Going through the fine detail of the quarterly report, the Bank’s governor Mark Carney said that as a result of a rosier growth outlook, its forecast for the UK’s jobless rate had changed. It now believes there is a 40% chance that the unemployment level – currently 7.6% – will fall beneath its target by the end of 2014, given that the UK recovery is finally taking hold.
However Carney also urged some caution and said that the 7% threshold for unemployment – previously outlined as one of the three “knock-outs” in the Bank’s guidance on easing and rates – was merely a “way station”. Once the target had been reached Carney said the Bank’s monetary policy committee would reassess its policy stance, but that this was not as an automatic trigger point for a hike in rates.
Don’t expect a 2014 rise
Reacting to the report, Capital Economics said that while the market had never really “swallowed” the Bank’s initial projections on growth and unemployment and had priced in an initial rate rise in 2015, it expected policy to remain unchanged for far longer than others expected, arguing that the shift in the Bank’s forecasts only served to bring them into line with consensus, while Carney seemed eager to manage the market’s expectations about what its change in view means.
“Given all of this, we retain the view that interest rates will remain on hold rather longer than the markets expect as the effects of the large amount of spare capacity in the economy keep inflation low,” said Capital’s Jonathan Loynes, chief European economist.
However Markit Economics’ Chris Williamson said that even the Bank’s new projections may be too pessimistic.
