More fund managers expect interest rate hike in Q2

Expectations the Bank of England (BoE) and European Central Bank (ECB) will raise interest rates in the second quarter of 2011 have risen dramatically, a new survey of fund managers shows.

According to the Bank of America (BofA) Merrill Lynch monthly European Fund Manager Survey, 40% of respondents now expect the BoE to raise rates from the current level of 0.5% in Q2 2011. An equal number of managers believe a hike will come in Q3.

Last month, just 17% of respondents expected a rate hike in Q2, with 31% forecasting rates to go up in Q3 and another third saying a rise was not likely until Q4.

The survey, which was conducted between the 4 and 10 of March, before the earthquake in Japan, also shows a dramatic shift in expectations of a rate rise in the Eurozone.

It found 72% of fund managers are now predicting the ECB will lift rates in the second quarter wheras no respondents had expected such a move the previous month.

The shift in sentiment comes after ECB president Jean-Claude Trichet earlier this month said the ECB may raise rates from their current record low of 1% at next month's meeting.

Soaring commodity prices have been strengthening the case for higher interest rates in recent months.

Last month, three of the BoE's nine-member Monetary Policy Committee voted in favour of raising interest rates, up from two members in the January meeting. High inflation, caused largely by rising prices for oil and other commodities, were among the factors cited by the three members in favour of higher rates.

Fund managers' increased expectations of imminent interest rate rises come amid worries of ‘stagflation' according to BofA Merrill Lynch.

"The shift in the March survey is toward stagflation, with lower growth expectations and higher inflation and interest rate expectations causing cash levels to rise," says Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research.

"If the oil price reverses, this change could prove quite fleeting," adds Gary Baker, head of European equities strategy at BofA Merrill Lynch Global Research.

"There has been no massive sell-off; investors are in wait-and-see mode."

Reporting from Sharecast