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Will BoE inflation report signal early rate hike?

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The Bank of England (BoE) might have lacked the fireworks of the European Central Bank last week when it left its monetary policy unchanged but, with the U.K.'s economic data steadily improving, analysts are now questioning whether the central bank could hike interest rates sooner than it had forecast back in July.

Then the bank said that it would not consider raising interest rates from their current 0.5 percent until the jobless rate falls to 7 percent, which the bank had not expected to happen before the end of 2016.

A barrage of improving economic data recently, however, could see the bank revise its inflation, growth and unemployment forecasts on Wednesday when it publishes its latest quarterly inflation report. As such, any revision could signal it will increase interest rates earlier than mid-2016.

Indeed, while last week the European Central Bank surprised investors by cutting interest rates further in the face of stalling economic growth in the euro zone and deflation concerns, the BoE is looking at economic recovery – and the opportunity to tighten monetary policy sooner.

Better-than-expected growth data over the last nine months has come amid improving business activity and consumer confidence. Unemployment, meanwhile, has also fallen faster than expected to 7.7 percent in October, further raising analyst expectations that the bank could raise interest rates sooner rather than later.

In its October meeting, the bank forecast that unemployment would continue to fall and output would grow faster than it had previously predicted in its August Inflation Report in which it had implied it would not be cutting interest rates before mid-2016

The chief U.K. and European economist at IHS global Insight said he believed that the bank would amend its forecasts and forward guidance but would be cautious in doing so.

"It seems highly likely that the November Inflation Report will see a raising of the Bank of England's growth forecasts and a lowering of its unemployment forecasts, which will open the door to the bank starting to raise interest rates before mid-2016," Howard Archer told CNBC, forecasting that the bank would see unemployment getting down to 7.0 percent in late-2015/early-2016.

(Read more: UK economy should beware 'weapons of mass distraction')

"The Bank of England will likely argue that there are still good reasons to expect unemployment to come down relatively slowly overall and it will likely not want to encourage any further bringing forward of market expectations of interest rate hikes."

Archer said that despite the encouraging news on the economy, any change in interest rates still looked "a long way off" and IHS forecast a gradual increase in rates starting in the latter months of 2015. Conversely, he said that any further quantitative easing now looked "highly improbable."

The BoE is keen to avoid the "taper tantrum" that hit global markets on expectations that the U.S. Federal Reserve could start to imminently withdraw its stimulus program. Markets around the world – particularly emerging markets – suffered a rout as investors withdrew their money from stocks which have been buoyed by extra central bank liquidity.

In an interview with Cardiff's Western Mail newspaper during a visit to Wales in late-October, the BoE's Governor Mark Carney was emphatic: "We're not going to look to tighten monetary policy until we see real traction and momentum in this recovery that has been sustained for some time"

(Read more: Bank of England: 2014 rate rise very unlikely)

Chris Scicluna, chief economist at Daiwa Capital Markets said that while he would certainly expect the economic forecasts to be amended, he also felt that the bank would only adjust its forward guidance – and the data necessary for it to increase rates -- rather than the rates themselves.

"Even if we got to an unemployment rate of 7 percent they could then say that interest rates won't rise until it hits 6.5 percent – it all depends on the context of what's happening elsewhere in terms of inflation and growth the economy," he told CNBC on Monday.

"If unemployment falls but real wage growth is negative there would be no need to raise rates," Scicluna said, noting that the economy had only just started its recovery.

"Just look at the taper tantrums in the U.S. or in the euro are with inflation data surprising to the downside. These just go to show there's still a huge amount of uncertainty out there."

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt

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