S&P says Bank of England is talking up sterling to fight inflation

By William Schomberg

LONDON (Reuters) - Ratings agency Standard & Poor's says it is "a bit sceptical" about Britain's need for an interest rate hike soon, and that recent Bank of England comments that one may be in the offing seem designed to push up sterling and cool inflation.

"Overall, we believe the Bank and Mark Carney's recent statements are primarily aimed at propping up sterling to reduce imported inflation pressures," S&P analysts said in a report released on Wednesday.

"This strategy may include an actual 25 basis point hike in November, thus bringing the policy rate back to where it was before the Brexit referendum. Additional moves in 2018 do not appear warranted on the back of a slowing economy," it said.

The BoE surprised investors last month when it said most of its rate-setters thought it was likely that borrowing costs would need to rise "in the coming months", as it saw growing upward pressure on inflation which already exceeds the central bank's 2 percent target and is likely to hit 3 percent soon.

S&P noted how incomes, when adjusted for inflation, were falling and that it expected another weak third quarter for the economy, based on recent data.

A spokesman for the BoE declined to comment on the S&P report, which was based on a quarterly meeting of the ratings agency's credit conditions committees.

S&P stripped Britain of its triple-A rating after the Brexit vote last year, downgrading it by two notches to AA and assigning a negative outlook.

S&P also said on Wednesday it saw signs of a slowdown in investment by companies in Britain as a result of uncertainties over Brexit.

"We believe that adjustments to longer-term UK business plans, including capital and foreign direct investment, could start to have a more tangible economic impact as we move into next year," it said.

S&P welcomed Prime Minister Theresa May's comments that Britain would seek a roughly two-year transition period for leaving the European Union but said "the extended delay implies a longer period of uncertainty until both parties can agree on the shape of their future relationship".

(Reporting by William Schomberg. Editing by Jeremy Gaunt)