Writing in its Inflation Report, out this morning, the Bank said, while the unemployment rate has declined to its lowest level in five years and output is estimated to have grown by more than 3%, and the margin of spare capacity has probably narrowed a little since its updated guidance set out in the February inflation report, “the MPC continues to judge that there remains scope to make greater inroads into slack before raising Bank Rate.”
Asked when borrowers could expect such a rise in rates to take place, Mark Carney, Governor of the Bank of England, would not commit to a date but said the Bank would not take risks with price or financial stability or the incipient economic expansion.
But he added: “To use a sporting metaphor, securing the recovery is like making it through the qualifying rounds of the football World Cup, it is an achievement but it is not the main prize. For the economy, the main price is economic stability. We are just at the beginning of that process and we are setting policy to make sure we win that prize.”
In its inflation report, The Bank said “the MPC’s current aim is to keep inflation close to the target, while supporting the economic expansion such that spare capacity is absorbed.
And, it said, given the likely persistence of headwinds weighing on the economy, “when Bank Rate does begin to rise, it is expected to do so only gradually.”
During the press conference, Carney reiterated this point and said: “As the expansion progresses, there will need to be gradual and limited increases, but they will remain low in historical terms. And, the timing of such increases will be a product of the evolution of the economy.”
The Bank said: “The expansion now appears more broadly based than previously estimated, with spending by both households and businesses having grown solidly in 2013. The revival in the housing market — with transactions up a third over the past year and house prices around 10% higher nationally — underpinned strong growth in housing investment.”
According to the Bank fourth quarter GDP growth is expected to ease in the near term, “as the initial fillip from the release of pent-up demand fades” but it should remain relatively steady thereafter.”
Risks
The Bank also acknowledged that domestic and foreign risks to the outlook remain.
“Externally, the need for further adjustment within the euro area continues to pose a downside risk to UK growth, as does the possibility of an end to the relative calm within financial markets, perhaps triggered by the prospect of policy normalisation in some advanced economies.”
At home, it writes, the main downside risk is that the pickup in growth proves to be unsustainable, either because productivity and real incomes continue to disappoint or because the recovery in business investment does not take place as expected.
