LONDON (Reuters) – Britain’s unemployment rate will fall much faster than previously expected due to a strengthening economic recovery, the Bank of England said on Wednesday, but it stressed that it was in no hurry to raise interest rates.
Governor Mark Carney committed in August to keep interest rates at a record low 0.5 percent until unemployment fell to 7 percent – something the BoE predicted at the time could take three years.
But in a new set of brighter economic forecasts, the central bank said unemployment could hit 7 percent in the last three months of 2014, around two years earlier than it expected in August.
“For the first time in a long time you don’t have to be an optimist to see the glass is half full. The recovery has finally taken hold,” Carney told a news conference after the bank published its quarterly inflation report.
However, the central bank stressed that its Monetary Policy Committee was not about to raise interest rates any time soon, as headwinds remained, particularly from the euro zone.
“The MPC’s intention (is) to maintain the exceptionally stimulative stance of monetary policy until there has been a substantial reduction in the degree of economic slack,” it said.
Carney reiterated that a fall in unemployment would not be an automatic trigger for an increase in interest rates.
Sterling jumped and British government bond prices fell to their lowest level in four weeks as investors adjusted to the Bank’s new, shorter timeframe for when unemployment might fall to its threshold for considering an interest rate hike.
Financial markets – which were skeptical about the BoE’s August unemployment forecast – had been pricing in a rise in BoE interest rates around early 2015.
But if interest rates rise as the market expects, growth will be weaker and unemployment will prove slower to fall, the BoE predicted, saying that in this case its mean forecast was for unemployment to stay above 7 percent until the end of 2016.
Data published earlier on Wednesday showed Britain’s unemployment rate fell to 7.6 percent in the three months to September, edging close to the Bank’s threshold.
The BoE said that its central forecasts were now all based on market interest rate expectations, but that did not mean that it believed these rate expectations were correct.
Nonetheless, on this basis it expects inflation to fall below its 2 percent target at the start of 2015 – six months earlier than it had expected in August.
It also revised up its growth forecasts for this year and next. It sees 0.9 percent growth in the last three months of 2013, taking full-year growth up to 1.6 percent compared to 1.4 percent forecast in August. For 2014 it expects annual growth of 2.8 percent, compared to 2.5 percent predicted in August.
Britain’s economic output remains well below pre-crisis levels, however, unlike in most other major economies, and the belief that there is a large amount of unused capacity in Britain is what makes the BoE want to keep rates on hold.
Unlike private-sector forecasters, most of the BoE’s Monetary Policy Committee are convinced that weak labor market productivity will rebound sharply as growth picks up, allowing rapid expansion without creating much extra demand for workers.
Britain’s unemployment rate was nearer 5 percent before the financial crisis, and deputy governor Charlie Bean suggested last month that the 7 percent threshold could be lowered if domestic inflation pressures appeared muted.
(Editing by William Schomberg/Jeremy Gaunt)