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Economic recovery 'has taken hold'


The Bank of England is to deliver its quarterly inflation report today

The Bank of England is to deliver its quarterly inflation report today

The Bank of England is to deliver its quarterly inflation report today

Bank of England governor Mark Carney signalled today 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.

Mr 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".

Mr 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%.

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

But the governor has repeatedly 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, unemployment falling more quickly, and inflation close to target.

He said: "Such policy trade-offs will inform future MPC decisions on the timing of any Bank rate increase after the threshold is reached."

The low-interest rate policy is part of the Bank's monetary stimulus helping to nurse the UK back to health after the downturn, and also includes a quantitative easing programme injecting £375 billion into the economy.

Mr Carney said: "We will continue to provide exceptional monetary stimulus so that British households and businesses have, for the first time in a long time, the confidence not just that the glass is half full, but that it will be filled."

However, one analyst claimed that by announcing a "forward guidance" pledge on interest rates, the bank had "shot itself in the foot".

Simon Smith, head of research at FxPro, said that the link to unemployment and resulting expectations that rates would rise meant that market borrowing rates rose - rather than falling on lower inflation projections.

"Ironically, if it were not for the forward guidance, market rates would have moved lower today, which would have eventually fed through to households and businesses," he said.

"From this perspective, it's pretty clear that forward guidance has not worked."

Capital Economics said the report provided some support for market expectations that interest rates could rise some time in 2015, rather sooner than the Bank of England suggested in August.

But its chief European economist Jonathan Loynes said he believed rates would remain on hold rather longer than the markets expect, primarily because inflation would remain weak.

He said: "However, we fear that Mr Carney and colleagues will have their work cut out to prevent market rates from rising further - potentially adversely affecting the economic recovery - if unemployment remains on its recent downward trend."

In an interview with Channel 4 News, Mr Carney admitted that people should not expect their wages to rise in real terms until mid-2014 at the earliest despite the growing economy.

"I think some - not everybody across the country is feeling this, without question," he said.

"There's still a million more people out of work than were in work prior to the crisis... but what is happening is 60,000 jobs per month, new jobs, are being created, most of those in the private sector, most of those full-time. And that's real work, real people."

Mr Carney acknowledged that real wages "are not picking up, they haven't been for a number of years".

"What's required is that business starts to have as much confidence in the recovery that's necessary for them to start investing and that's going to help boost real wages," he told the programme.

"So when the second half of our forecast - middle of 2014 through to the end of 2016 - embedded in that forecast that we just released today, is that you start to see real wage gains.

"In order to get that though, we need businesses to have the confidence that this recovery is going to be durable, which is why were doing what were doing with the banks, and what we're doing with monetary policy."

Asked if he would be prepared to raise interest rates before the General Election, Mr Carney replied: "Well, absolutely."

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