Bank of England governor Mark Carney signals UK economic recovery

Bank of England governor Mark Carney signalled that the UK economic recovery had "finally taken hold" but sought to allay fears that the better prospects would mean interest rates rising sooner than expected

Bank of England governor Mark Carney
Bank of England governor Mark Carney

Bank of England governor Mark Carney signalled that the UK economic recovery had "finally taken hold" but sought to allay fears that the better prospects would mean interest rates rising sooner than expected.

Markets were not reassured however and shares fell, the pound rose and borrowing costs increased on the assumption that a rise would come more quickly - prompting claims that the “forward guidance” policy linking interest rates to unemployment had backfired.

The report said this year would see gross domestic product (GDP) grow 1.6%, up from a previous 1.4% forecast, and Mr Carney said unemployment would fall to a key threshold of 7% earlier than had been thought.

Carney hailed low inflation, jobs being created at a rate of 60,000 a month and the strongest rate of improvement in six years.

The current quarter was expected to see growth of 0.9% and the growth forecast for 2014 was upgraded from 2.5% to 2.8%.

Meanwhile predictions for inflation - currently at 2.2% - were revised downwards, with the Bank expecting it to fall to around its 2% target “over the next year or so”.

Carney said: “For the first time in a long time, you don’t have to be an optimist to see the glass as half full. The recovery has finally taken hold.”

But the governor was faced with having to assuage fears of an interest rate rise, just three months after announcing the forward guidance pledge designed to provide reassurance to businesses and households about the cost of borrowing.

Policymakers have pledged not to raise rates from the current historic low of 0.5% before the jobless rate falls to 7%, so the better jobs picture fuelled market fears that they would go up sooner than previously believed.

The latest report predicted that there was now a more than 50% chance of the threshold being met by the third quarter of 2015, against the Bank’s expectation at the time of the previous report, pencilling in the second quarter of 2016.

However, statistics used by the Bank’s Monetary Policy Committee (MPC) also indicated its central projection was that joblessness would still be just above the threshold, at 7.1%, by the final quarter of 2016.

It means that while the central projection for unemployment is that it will not reach the 7% before the end of 2016, the chances that it will do are calculated to have increased.

Official figures published at the same time as the report showed the jobless rate had now fallen to 7.6%.

Carney said: “The MPC now expects the 7% threshold to be reached earlier than we did in August.”

But the governor has stressed that the “forward guidance” linking interest rates to joblessness did not mean that reaching the threshold would automatically trigger a rate rise.

Launching the report, he said forecasts showed sticking with the low rates for the next three years would result in GDP growth nearly 1% stronger.

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