By Jonathan Cable
LONDON, (Reuters) - The Bank of England is not likely to change its estimate of spare capacity in Britain's economy when it publishes its latest Inflation Report on Wednesday but will soon address booming house prices, a Reuters poll found.
Governor Mark Carney faces the growing challenge of explaining why the central bank is signalling it is in no hurry to raise record-low interest rates, even as Britain's recovery picks up speed.
The Bank initially tied its forward guidance on when it might raise interest rates to the unemployment rate. But a surprisingly strong jobs market soon forced it link its guidance to the degree of spare capacity in the economy which is hard to measure and to forecast.
The Monetary Policy Committee in February estimated that the amount of slack in the economy was equivalent to about 1.0-1.5 percent of gross domestic product.
A majority of the 25 economists polled by Reuters in the past week said that range was still about right.
"Carney knows that any significant reduction would trigger a change in rate expectations. He is not yet ready to tighten policy so only a small change in the gap is likely," said Brian Hilliard, UK economist at Societe Generale.
Ten respondents said the Bank would leave the range unchanged while eight gave forecasts within the MPC's previous forecast of 1.0-1.5 percent of GDP. Only six nudged down the lower end of the range while one said it would be 2 percent.
Recent Reuters polls have suggested interest rates will stay at a record low of 0.5 percent at least until April next year. But with the economy growing faster than any other big rich nation the chance of an earlier hike is growing. BOE/INT
Economists said the Bank may signal this week that it is comfortable with the view in markets that rates will start going up in the first three months of 2015 - just before Britain holds national elections in May and a calendar quarter earlier than it suggested at the time of its last forecasts in February.
However, despite the economy performing well, 17 of 33 economists said the Bank would leave its GDP forecasts unchanged. Fourteen said it would raise them.
Inflation dropped below the Bank's 2 percent target earlier this year. Seventeen of 33 economists said this would prompt a lowering of its CPI projections while 15 said it would hold them steady, taking some pressure of the Bank to act.
But with the recovery becoming more entrenched, house prices have risen so fast that many economists said the Bank's Financial Policy Committee will have to act to avoid another housing market bubble.
BoE Deputy Governor Jon Cunliffe told bankers earlier this month it would be "dangerous" to ignore the rapid rise in house prices, which rose nearly 11 percent over the past year, according to one measure - the kind of increase last seen on the eve of the financial crisis.
The FPC, which a year ago gained sweeping but largely untried powers to curb excesses in the financial sector, next meets on June 17.
Slightly more than half of the economists polled - 14 of 24 - said the FPC would act then. Seven said it would move later this year and only three said it would do nothing this year.
"The Financial Policy side of the Bank will next month, in our view, deploy its new tools to take some of the heat out of the housing market," said Rob Wood at Berenberg.
With the Bank reluctant to raise interest rates and choke off the recovery, it might instead require banks to check that new borrowers could cope with much higher interest rates. It might also make banks hold more capital against certain types of mortgages, or urge caps on how large mortgages can be compared to a borrower's income.
((Polling by Sarmista Sen and Sarbani Haldar Editing by Jeremy Gaunt))