Bank of England cuts jobless forecast, in no rush to raise rates

Wednesday 14 May 2014 14.07
Bank of England issues new economic forecasts today
Bank of England issues new economic forecasts today

The Bank of England said it was still in no rush to raise interest rates in a quarterly update to its economic forecasts today.

This leaves it on track to raise rates in around a year's time. 

The UK's central bank lowered its forecast for unemployment for the next couple of years, but left largely unchanged its growth and inflation forecasts, as well as its assumptions on the timing of interest rate rises.

The Bank of England forecast that inflation in two years' time would still be just below its 2% target, assuming interest rates rise in the second quarter of next year - around the time of a national election.

Strong recent data means that some analysts had been cautiously bringing forward their expectations of when the bank will raise interest rates in recent weeks, and in recent days markets have priced in a rate move for around nine months' time.

Britain's economy looks set to grow faster than any other big industrialised nation this year, and house prices have jumped by about 10% over the past 12 months, raising fears of a new property bubble.

But the central bank has been keen to stress that the economy is only just recovering its size of before the financial crisis, having taken far longer than most of its peers to get growth going again.

Today's forecasts from the Bank of England predict growth of 3.4% this year - unchanged from February - but unemployment is expected to drop faster than previously forecast, falling to 5.9% in two years compared to 6.4% in February's forecast.

The recent strengthening in sterling would cancel out the upward inflation pressure from the greater fall in joblessness and a slightly weaker productivity outlook, the BoE said.

It repeated that only an unemployment rate of 6-6.5% would start to push up inflation.

But it said that the level of unemployment that would push up inflation would decline as more long-term unemployed entered the workforce, and that in three years time, unemployment could be as low as 5.25-5.75% without creating price pressures.

Before the financial crisis, Britain's jobless rate averaged around 5%.

The BoE said that UK firms were currently operating at full capacity, but that significant slack remained in the labour market, with unemployment and average hours worked both below pre-crisis levels.

In February, the bank said that this slack was in a range equivalent to 1.0-1.5% of gross domestic product, and today it said slack was now at a lower point in this range, though it did not give an exact figure.

"The path of slack is uncertain, and there is a range of views on the Committee. For a given growth profile, it will depend heavily on the timing and strength of the rebound in productivity growth," the BoE said.

Some economists think that at least one member of the bank's MPC may vote for higher interest rates within the next few months.