An employee walks over a mosaic floor at the Bank of England in London yesterday.
LONDON: Britain’s unemployment rate will fall much faster than previously expected due to a strengthening economic recovery, the Bank of England said yesterday, but it stressed that it was in no hurry to raise interest rates.
In a set of new, upbeat forecasts, the central bank said unemployment could hit 7 percent late next year if interest rates stay unchanged, around two years earlier than it expected in August.
That was when Governor Mark Carney committed to keeping interest rates at a record low 0.5 percent until unemployment falls to 7 percent — something the BoE predicted at the time could take three years.
Carney reiterated yesterday, however that a fall in unemployment would not be an automatic trigger for an increase in interest rates.
Some economists said the new forecasts risked confusing British consumers and businesses because of the size of the changes and differing scenarios for its jobs forecast.
Societe Generale economist Brian Hilliard said the change damaged the credibility of the forward guidance programme. “The basic message is that they got the unemployment threshold wrong.”
Carney, meanwhile, sounded his most upbeat about the British economy since he took over the central bank in July.
“For the first time in a long time you don’t have to be an optimist to see the glass is half full. The recovery has finally taken hold,” he told a news conference after the bank published its quarterly inflation report.
However, the central bank stressed that its Monetary Policy Committee was not about to raise interest rates any time soon, as headwinds remained, particularly from the eurozone. “The MPC’s intention (is) to maintain the exceptionally stimulative stance of monetary policy until there has been a substantial reduction in the degree of economic slack,” it said.
Data published earlier yesterday showed Britain’s unemployment rate fell to 7.6 percent in the three months to September, edging close to the Bank’s threshold.
Sterling jumped and British government bond prices fell to their lowest level in four weeks as investors adjusted to the Bank’s new, shorter timeframe for when unemployment might fall to its threshold for considering an interest rate hike.
Financial markets — which were sceptical about the August unemployment forecast — had been pricing in a rise in BoE interest rates around early 2015 and those bets were unchanged after the Bank’s new projections.
The BoE issued forecasts based on different scenarios and which came to different conclusions as to how fast the jobless rate will fall, in contrast to August, when it only forecast unemployment based on constant interest rates.
If interest rates rise as the market expects, growth will be weaker and unemployment will prove slower to fall, the BoE predicted, saying that in this case its mean forecast was for unemployment to stay above 7 percent until the end of 2016.
The BoE said that its central forecasts were now all based on market interest rate expectations, but that did not mean that it believed these rate expectations were correct.
Carney also faced toughly worded questions from reporters about the value of using forecasts to steer the economy back to health when they change so much.
The Canadian said that without the long-term guidance, Britain’s economy would be at risk of premature increases in borrowing costs in markets.
“Let’s say we didn’t have forward guidance in August ... the discussion would be ‘Is the Bank going to raise rates today?’ No one is asking that question today, and rightly so, because that would be foolish, that would put us in a position of taking a recovery which is finally taking hold and basically pulling the rug out from under it,” he said.
Based on market interest rate expectations, the BoE expects inflation to fall below its 2 percent target at the start of 2015 — six months earlier than it had expected in August. Reuters
