The Bank of England has hinted that UK interest rates may need to rise in just over one year from now from their current 0.5 percent and that they would then increase gradually.
It said market expectations of a rate hike in the second quarter of 2015 – around the time of a general election in May – were in line with its aim to keep inflation at 2.0 percent.
Governor Mark Carney said Britain’s central bank is monitor a broad range of indicators including unemployment, business surveys and the
number of hours worked in order to assess the need to put up borrowing costs.
“The message to businesses, to households is that the Bank rate is going to follow a path that is consistent with jobs, with incomes and with spending growing in a sustainable way,” Carney said.
Previously Carney had said the jobless rate alone would be the guide, but was wrong footed when unemployment fell much faster than expected.
Soon after taking up the job Carney made an unprecedented pledge to keep rates on hold until unemployment fell to 7.0 percent. The Bank said that would take three years.
Barely six months later, unemployment stands at 7.1 percent, and the BoE has forecast it will hit 7.0 percent in the three months to the end of January and will sink further to 6.5 percent by early next year.
The Bank of England also sharply revised up its forecasts for economic growth over the next three years.
For 2014 it is looking at 3.4 percent expansion, which is much more optimistic than most other economists. Previously it had forecast 2.8 percent growth.
Carney, defended the BoE’s decision to adopt a forward guidance plan last year, even though the first version was quickly overtaken by a fast fall in the unemployment rate to which the pledge of low rates was linked.
“Forward guidance is working,” Carney told a news conference. “Expected interest rates have remained low even as the economy has recovered strongly, uncertainty about interest rates has fallen, and most importantly, UK businesses have understood the message.”
The pound hit a two-week high against the dollar and British government bond prices fell after the Bank’s announcement.