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BOE suggests interest rates will rise early next year
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The Bank of England hinted yesterday interest rates may need to rise in just over a year after it sharply revised up its forecasts for economic growth over the next three years.
It also announced an update to its “forward guidance” policy laying out the likely path for rate changes, saying it will focus on a range of measures of the spare capacity, or slack, in Britain’s economy.
The BOE said interest rate increases in line with current market expectations seemed consistent with keeping inflation close to its 2 percent target. It added that markets priced in a first rate rise in the second quarter of 2015.
It stressed any interest rate rises would be gradual, and the ultimate level of British interest rates was likely to end up well below the 5 percent average before the financial crisis.
The Bank’s Governor Mark 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 said. “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 BOE was forced into making a new statement on when and how it intends to raise interest rates by the unexpectedly sharp fall in unemployment since Carney made his first stab at forward guidance in August.
Shortly after arriving from his native Canada, Carney persuaded the other eight BOE policy-makers to make an unprecedented pledge to keep rates on hold until unemployment fell to 7 percent. The BOE said that would take three years.
Barely six months later, unemployment stands at 7.1 percent, and the BOE forecasts it will reach 7 percent in the three months to January and sink further to 6.5 percent by early next year.
Carney said the BOE will now monitor a broad range of indicators including unemployment, business surveys and the number of hours worked as it weighs up the need for an increase in interest rates.
Britain’s economy has grown at an annualized rate of 3 percent since August. But output is still 2 percent below its 2008 peak, unlike many other advanced economies, which have more than made up the damage caused by the financial crisis.
The BOE revised up its growth forecast for 2014 to 3.4 percent from 2.8 percent, a more bullish forecast than most other economists, and one which the BOE said was due in part to its belief the Office for National Statistics had underestimated fourth-quarter gross domestic product growth.
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