Bank of England sees faster-than-expected recovery

Bank of England governor Mark Carney says unemployment in Britain is falling faster than anticipated, raising speculation in the markets that interest rates may start rising sooner than expected.

British unemployment rate declining more quickly than predicted, bank says

Bank of England Governor Mark Carney smiles during the bank's quarterly inflation report news conference at the Bank of England in London on Wednesday. Britain's unemployment rate will fall much faster than previously expected due to a strengthening economic recovery, the bank said Wednesday, but it stressed that it was in no hurry to raise interest rates. (Toby Melville/Reuters)

Bank of England governor Mark Carney said unemployment in Britain is falling faster than anticipated, raising speculation in the markets that interest rates may start rising sooner than expected.

Following figures Wednesday showing unemployment dropped again, Carney said the British economy, Europe's third-largest, was showing clear signs of recovery.

"For the first time in a long time, you don't have to be an optimist to see the glass as half full," Carney said in a press conference following the publication of the Bank's quarterly economic projections. "The recovery has finally taken hold."

Nevertheless, he cautioned that the recovery still faced headwinds and now wasn't the time to tighten monetary policy. As well as holding its main interest rate at a record low of 0.5 per cent since 2009, the Bank has pumped 375 billion pounds into the economy to keep market rates low and encourage banks to lend.

"There is a long way to go before the aftermath of the financial crisis has cleared and economic conditions normalize," the bank's Monetary Policy Committee said in its overview of the quarterly Inflation Report.

The British economy is still smaller than it was before it fell into the deepest recession since World War II. Britain's economy is about 2.5 per cent smaller than at its peak in the first three months of 2008.

Signs of life have emerged of late, notably in the housing sector, which many fear is beginning to overheat, particularly in and around London.  

Earlier, the Office for National Statistics said the unemployment rate fell to 7.6 per cent in the three months to September from 7.7 per cent in the previous three-month period. The Bank of England is watching the rate closely, having said it won't consider raising interest rates before unemployment hits seven per cent.  

Buoyant growth outlook

Carney sought to ease concerns that hitting that unemployment level will trigger an automatic increase in interest rates, calling it a "staging post" for thinking about policy.

The faster than anticipated fall in unemployment, combined with a more buoyant economic growth outlook, to change the Bank's projections. According to the projections, the Bank thinks there is now a greater than 50 per cent probability of the seven per cent threshold being achieved by the third quarter of 2015. That's been brought forward from the second quarter of 2016.

However, the Bank has also revised down its forecasts for inflation, which remains its primary policy concern. Inflation is expected to fall to around the two per cent target over the next year.

"Going forward, the Bank of England can rest easy — inflation is falling while growth is rising, which can support policy remaining on hold for some time," said Kathleen Brooks, research director at Forex.com. "We believe we will have to see the entire economy get back above 2008-09 levels to spur the Bank to action, and that could still take some time."  

That may explain why the response in the market was muted. The pound was trading 0.4 per cent higher at $1.5951.

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