Speculation mounts over Bank move that could herald interest rate rises

Bank of England policymakers will gather for their first meeting of the new year this week amid mounting expectations that governor Mark Carney will change the threshold for considering interest rate rises within months.

Thursday’s decision will see monetary policy held once more, but comes as economists predict the Bank will soon lower the unemployment target under its forward guidance policy due to the strength of the economic recovery.

The Bank has pledged not to look at raising rates above 0.5 per cent until the unemployment rate falls to seven per cent, at the time predicting this would not be reached until 2016.

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But unemployment has been falling sharply – down to a lower than expected 7.4 per cent in October – as the recovery gains traction, meaning the threshold could be hit far sooner.

While the Bank is not expected to make any changes to its forward guidance policy at this week’s meeting, it could reduce the unemployment target to 6.5 per cent as soon as next month, according to experts.

Alan Clarke, of Scotiabank, said unemployment was “falling like a stone”.

He added: “We think that seven per cent will be hit in the early months of 2014. As a result, the Bank is likely to modify its forward guidance policy – lowering the threshold to 6.5 per cent – most likely at the February inflation report.”

Brian Hilliard at Societe Generale said the threshold could “easily” be reduced below 6.5 per cent.

Despite the Bank’s assurances that rates will stay low for some time, the recent pace of recovery has led to fears that borrowing costs will have to rise soon.

Closely-watched survey figures from the manufacturing and construction sectors last week confirmed a strong end to 2014, with both notching up their best quarterly performances for many years.

Economists are now forecasting that gross domestic product growth picked up pace to 0.9 per cent in the fourth quarter, from 0.8 per cent in the third.

Mr Hilliard said the Bank’s Monetary Policy Committee is not “anywhere near ready to raise rates, given the general state of the economy”.