Bank of England hints at 2015 rate rise

In a quarterly update to its economic forecasts, the central bank said interest rate increases in line with current market expectations appeared to be consistent with keeping inflation close to its two per cent target. The Bank said markets priced in a first rate rise in the second quarter of 2015.

It stressed that interest rate rises would be gradual, and that the ultimate level of British interest rates was likely to end up well below the five per cent average before the financial crisis.

“Despite the sharp fall in unemployment, there remains scope to absorb spare capacity further before raising Bank Rate,” the Bank said.

“When Bank Rate does begin to rise, the appropriate path so as to eliminate slack over the next two to three years and keep inflation close to the target is expected to be gradual,” it added.

The Bank has been forced into making a statement on when and how it intends to raise interest rates by the unexpectedly sharp fall in unemployment since Bank Governor Mark Carney made his first stab at forward guidance in August.

Shortly after arriving from his native Canada, Carney persuaded the other eight Bank policymakers to make an unprecedented pledge to keep rates on hold until unemployment fell to seven per cent. The Bank said that would take three years.

Barely six months later, unemployment stands at 7.1 per cent, and the Bank forecasts it hit seven per cent in the three months to January and will sink further to 6.5 per cent by early next year.

Britain’s economy has grown at an annualised rate of three per cent since August. But output is still two per cent below its 2008 peak, unlike many other advanced economies, which have more than made up the damage caused by the financial crisis.

The Bank revised up its growth forecast for 2014 to 3.4 per cent from 2.8 per cent, a more bullish forecast than most other economists, and one which the Bank said was due in part to its belief that the Office for National Statistics had underestimated fourth-quarter gross domestic product growth.

The Bank says room remains for more growth without stoking inflation, despite a record number of people in work and business surveys that show bottlenecks in factories.