Belfast Telegraph

Interest rate rise unlikely until unemployment levels fall

by john collingridge

Markets are "spectacularly misguided" if they think interest rate rises are around the corner or that the economy is back to normal, a central banker has warned.

In a staunch defence of the Bank of England's new 'forward guidance' policy, David Miles said a few quarters of upbeat growth do not mean the economy is fixed, and Britain is likely to see a slow fall in unemployment.

The Bank launched the radical policy last month, saying it will not consider raising interest rates from their record low until unemployment has fallen to 7% from its 7.7% level – barring a spike in inflation fears.

Forward guidance aims to give confidence to spend, and that rates will stay low for three years.

But markets have responded to increasing signs of growth across factories, building sites, restaurants and banks with rises in market swap rates which fix mortgages pushing the pound up.

Investors increasingly predict unemployment will drop to 7% sooner than the Bank's mid-2016 forecast, pricing in interest rate hikes by mid-2015.

But Mr Miles, from the Bank's rate-setting Monetary Policy Committee told Northumbria University that rate hikes would derail Britain's "embryonic" recovery.

He said: "I am now more confident of recovery.What a potentially stronger path for output and confidence does not need now is tighter monetary policy."

Britain will need a long stretch of above-average growth to fill economic slack so that a steeper fall in the jobless total is unlikely.

Belfast Telegraph