By William Schomberg
LONDON (Reuters) - The Bank of England will have more than Brexit on its mind when it meets next week, as a slowdown in the global economy tests its plan to return to raising interest rates before too long.
Governor Mark Carney and his fellow interest rate-setters are expected to keep borrowing costs on hold at 0.75 percent on Thursday, with Britain at risk of leaving the European Union just 50 days later without a transition deal in place to ease the shock.
Prime Minister Theresa May, trying to placate lawmakers in her Conservative Party, is pushing for concessions from EU leaders on a key part of the Brexit deal that she agreed with them last year. That is something the bloc has said it will not do.
On top of the uncertainty about the Brexit stand-off, the loss of momentum in the world economy and in particular in the biggest EU countries is likely to exert a drag on Britain's stumbling economy.
On Wednesday, the U.S. Federal Reserve signaled its three-year run of raising rates might be ending, and the European Central Bank has sounded more worried that the euro zone's recovery has run out of steam.
"Is the global slowdown just temporary? We think so, but it has lasted quite a long time. Maybe we are at the peak of the cycle," George Brown, an economist with Investec, said. "Perhaps that's the view that the BoE takes, although it's not our view."
The BoE - which bases its forecasts on the assumption of a smooth Brexit - will try to balance the drag on Britain from a weaker global economic outlook with the potential boost from finance minister Philip Hammond's relaxation of his grip on public spending.
The BoE's forecasts for Britain's economic growth might therefore be little changed when it publishes its quarterly Inflation Report alongside its decision on rates on Thursday.
But some economists say there is a chance of a higher inflation forecast that makes investors rethink their bets against a BoE rate hike until the end of 2019 at the earliest.
Although inflation has fallen to within a whisker of the BoE's 2.0 percent target, the wages of British workers are rising at their fastest pace in a decade, surprising the BoE and potentially pushing up prices.
A minority of economists think one member of the nine-strong Monetary Policy Committee will vote for a rate hike next week.
That, plus the chance of the BoE turning even more pessimistic about the inflationary "speed limit" of Britain's low-productivity economy, "would set the UK apart as a hawkish story in an increasingly dovish world," HSBC economist Elizabeth Martins said. "It might come as a surprise to the market."
By the time the MPC announces its next policy decision on March 21, a few days before the scheduled Brexit date of March 29, the picture could look very different.
By then it should be clearer if the United States and China have avoided the prospect of a trade war, and - more importantly for the BoE - whether Britain will avoid a damaging no-deal Brexit, at least in the immediate future.
The BoE has warned that a worst-case Brexit scenario could hurt Britain's economy more than the global financial crisis.
Paul Dales, an economist with Capital Economics, said a deal on Brexit could lead to the unusual situation of the BoE raising interest rates at a time when the U.S. Fed is cutting them.
"It doesn't happen often, but nor does Brexit," he said. "Yes, the global economy seems to be turning. But the BoE has room for catch-up."