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Interest rates 'won't go up until mid-2011'

Expectations for the first rate hike from the Bank of England have been pushed back further into next year, according to a new survey of experts.

As the Bank of England's monetary policy committee prepares for its July meeting next week, a new poll from Reuters shows that economists now expect rates to stay at the current record low of 0.5% until the second quarter of 2011.

In the aftermath of George Osborne's austerity Budget, it seems economists now believe the Bank will be forced to give the economy a monetary helping hand: last month the same poll saw the first hike coming in the first quarter.

But the new survey indicates that rates could go up a full half-point to 1.0% in the second quarter of next year.

'The UK economy is in need of as much support it can get as it works through the painful, but required budget cuts,' said Stephen Pope from Cantor Fitzgerald, explaining why he expects rates to stay on hold longer.

MPC members have been candid recently in comments on the Bank's rates policy: Andrew Sentance said earlier this week that the Budget did not remove the need to restrain inflation by raising rates when necessary.

Sentance surprised markets last week when minutes from the MPC's June rate-setting meeting showed he voted for a hike in the bank rate to 0.75% in order to rein back inflation.

Although UK consumer price inflation fell more than expected in May to 3.4% from April's 17-month high of 3.7%, it is still well above the 2% target and has largely surprised on the upside this year.

'Inflation seems set to continue to exceed expectations but a majority on the MPC is likely to favour leaving the Bank rate unchanged until the effects of fiscal cuts on the economy are clearer,' said Stephen Lewis of Monument Securities.

On Wednesday, MPC member Adam Posen also sent out a warning on inflation, although he added that this was not sufficient to warrant policy tightening with an unclear growth outlook.

The economists polled by Reuters were clearly in accord against raising rates too soon. Analysts gave a 28% chance of a rate hike before the end of the year - roughly the same as in June -- and an almost nil chance of any move at the Bank's next meeting next Thursday.

Fears are growing that - on top of the deflation contained in Osborne's Budget - any export-led boost the UK might get from a weaker pound will be killed off by a new wave weakness in the euro zone economies.

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