The inflation forecast that the Bank of England released yesterday made the economists adjust their forecasts about the terms of the potential rate hike. Generally investors’ expectations of the coming rate hike wave weakened.

According to British central bank, inflation will peak at 4.4% this year and before easing to the 2% target level by the middle of 2012 and then even lower. The outlook is based on BoE benchmark interest rate rising from a record low of 0.5% to 1% this year and 2% by the end of 2012.

However, the market was still fully pricing in a rate hike by June 9 with at least two 25 basis point rate hikes seen by the end of the year and a 96% chance of rates being 75 basis points higher by January 5, 2012.

Some economists also believe that the rate hike will occur sooner than they were thinking earlier. Strategists at Barclays, for example, changed the prediction for the first rate increase from November to May, while the Daiwa Capital Markets change forecast from November to August. It’s not likely that the BoE will raise rates by more than 50 basis points taking into account the country’s weak economic growth, say the specialists.

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