Bank of England set to sit tight on rates as uncertainty mounts

By William Schomberg

LONDON (Reuters) - The Bank of England looks set to keep interest rates on hold on Thursday as it awaits the impact on the economy of U.S. President Donald Trump's trade tariff onslaught and of the British government's imminent tax hike for employers.

With UK inflation stuck firmly above its 2% target, the BoE has cut borrowing costs by less than the European Central Bank and the U.S. Federal Reserve since last summer, contributing to the country's sluggish growth rate.

When it trimmed its benchmark Bank Rate to 4.5% in February, the BoE stressed it would move gradually and carefully with further cuts given the uncertainties hanging over the economy.

Since then, those uncertainties have only mounted in large part due to Trump gearing up to announce import tariffs for a host of trading partners of the United States on April 2, muddying the outlook for growth and inflation around the world.

The Fed on Wednesday cut its economic growth forecasts for this year, raised its inflation projection and said uncertainty had increased as it kept borrowing costs on hold.

At home, a hike in social security contributions paid by British employers goes into effect on April 6, something the BoE thinks could lead to price increases, weaker hiring or both.

Also on the Monetary Policy Committee's radar is finance minister Rachel Reeves' budget update speech next Wednesday in which she is expected to announce cuts to public spending plans, a big component of Britain's economic growth outlook.

"We expect the committee to hold rates steady, with little change to the guidance that will continue to favour caution and time optionality while the incoming cost shocks are digested," economists with Citi said in a note on Wednesday.

The BoE last month said it expected inflation to reach 3.7% later this year, up from January's 3%. Some economists say it will hit 4%, testing the BoE's assumption that there is little threat to longer-term price pressures through wage demands.

Data on Britain's labour market, including wage growth, are due to be released at 0700 GMT on Thursday.

"EXTRA INFLATION PERSISTENCE"

"The BoE is far too sanguine about elevated long-term consumer inflation expectations," Robert Wood, chief UK economist at Pantheon Macroeconomics, said. "We think extra inflation persistence is likely to result from faster price rises this year."

All 61 economists polled by Reuters this month predicted the BoE would keep Bank Rate on hold at 4.5% at its March meeting, with the next cut likely in May with further reductions in August and November.

Pricing in financial markets suggests investors see only two quarter-point rate cuts over the remainder of this year.

The economists polled by Reuters mostly expected seven members of MPC to back no change this week and the other two to favour a quarter-point reduction.

In February, the MPC voted 7-2 for its quarter-point cut with the two dissenters wanting a bigger, half-point reduction.

Another wildcard for the BoE at its discussions this week is the 500-billion-euro infrastructure and defence investment plan announced by Germany's leading political parties, on top of a new, 150 billion-euro European Union-wide defence programme.

Spending on that kind of scale is likely to boost economic growth in euro zone, potentially helping Britain.

(Writing by William Schomberg; Editing by Toby Chopra)