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Bank of England eyes earlier interest rate rises as recovery takes hold

Bank of England governor Mark Carney says there is a 40 per cent chance his threshold for interest rate rises could be met by the end of next year.

Under his forward guidance plans, unveiled in August, Carney said interest rates should not rise until unemployment falls below 7 per cent unless inflation was consistently above 2.5 per cent.

In the Bank’s quarterly inflation report, published today, Carney says there is a two in five chance the threshold could be reached next year, a 60 per cent chance by 2015 and a two-thirds chance by the end of 2016.

It is a significant shift from August forecasts when the Bank gave a 25 per cent chance of meeting the threshold by the end of next year.

The Bank had previously forecast a 40 per cent chance of unemployment falling below 7 per cent by the end of 2015, rising to a 50 per cent chance in early 2016.

Office for National Statistics data, published today, shows unemployment fell to 0.2 per cent to 7.6 per cent in the three months to September.

Inflation fell dramatically yesterday from 2.7 per cent to 2.2 per cent in October, a 13-month low.

Interest rates have remained at record lows of 0.5 per cent since March 2009 with former Prime Minister John Major this week suggesting they should rise to 5 per cent to help savers.

The Bank also made significant upgrades to UK growth forecasts for 2013 from 1.4 per cent to 1.6 per cent and for 2014 from 2.5 per cent to 2.8 per cent.

Carney also pledged to keep an eye on rising house prices and fix the financial sector through tough capital rules.

He defended his forward guidance policy and said he will consider other factors to rise rates and not just employment figures.

Speaking at a press conference today, he said: “The unemployment threshold is a staging post for assessing policy and not a trigger for automatic increases in interest rates. When the threshold is reached the monetary policy committee will set the policy for inflation against the need to provide support for the recovery.”

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. Fantastic quote from Mark Carney at the Inflation Report Press Conference today. “We make policy for the whole of the UK and not just for within the Circle Line “…… it use to be the M25 boundary and now we use the Circle line to define outer geography… . It is not that the UK is too centred on London or anything!

  2. So its nothing to do with London House Prices then?

    So much for forward guidance of three years? Its barely lasted three months!
    Given this ‘guidance’ caused the problems it did in Canada, surely Mr Carney had forward thinking to see what would happen – again….

    Still, when Mr Major want to tackle policy like its 20 years ago, well, this is just genius.

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