Mark Carney, governor of the Bank of England, speaks during the bank’s quarterly inflation report news conference in London, yesterday.

AFP/London

The Bank of England ramped up its 2014 economic growth forecast yesterday as Britain’s recovery picks up speed, and vowed to keep interest rates low after tweaking its guidance.

Gross domestic product (GDP) was set to grow by 3.4% this year, the central bank said in its latest quarterly report. That was up sharply from an earlier estimate of 2.8% given in November.

“The recovery has gained momentum. Output is growing at the fastest rate since 2007, jobs are being created at the quickest pace since records began, and after four years above target the inflation rate is back at 2.0%,” governor Mark Carney said.

Carney took charge of the BoE last August and launched the forward guidance policy, under which the BoE had stated that it will not raise record-low interest rates until the unemployment rate falls to at least 7.0%. However, the bank forecast yesterday that the jobless rate—which has fallen more sharply than expected amid the strengthening recovery—would hit 7.0% in the coming months.

As a result, the BoE added it would look at a “broad range of indicators” at that point, in order to assess the health of the labour market and establish whether borrowing costs should rise.

Under the latest guidance, the bank will seek to absorb all the spare capacity in the economy over the next two to three years to allow a full recovery.

When interest rates do begin to increase, it will be a gradual and limited process, according to the BoE.

The central bank also pledged to maintain its £375bn ($620bn, 456bn-euro) bond-buying stimulus programme, known as quantitative easing, until at least the first rate hike.

Interest rates have stood at a record low level of 0.50% since March 2009, when it also launched the vast QE stimulus to aid growth.

The bank meanwhile predicted fourth-quarter GDP growth would be revised to 0.9%, from 0.7%. It also expected the economy would grow by a robust 0.8% in the current first-quarter.

“Forward guidance is working,” Carney told journalists.

“Expected interest rates have remained low even as the economy has recovered strongly.

“Uncertainty about interest rates has fallen. Most importantly, UK businesses have understood the message.”

Canadian national Carney was last month forced to dampen talk of a rate rise anytime soon, following news that the unemployment rate fell faster than expected to 7.1%, a near five-year low point.

The bank stressed yesterday that borrowing costs “may need to remain at low levels for some time to come” as Britain grapples with the ongoing legacy of the financial crisis and other economic headwinds.

“If and when the time comes that the economy can sustain higher interest rates, bank rate is expected to rise only gradually,” Carney said.

“For a sustained and balanced recovery, the degree of stimulus will need to remain exceptional for some time.”

The BoE also predicted that 12-month inflation would remain at, or slightly below the bank’s official 2.0-percent target, over the forecast period.

The economy expanded at the fastest rate last year since before the global financial crisis, growing by 1.9% in 2013. That was the fastest pace since 2007.

“Despite the very sharp and unexpected fall in unemployment, the MPC still sees plenty of slack in the economy that must be used up before raising bank rate,” noted HSBC economist Simon Wells.

“Phase two of forward guidance offered no new targets or thresholds, but by arguing that there is a lot of spare capacity and with inflation projected to be below target 2-3 years ahead, governor Carney wanted to send a signal that rates are not moving soon.”

 

Related Story