Bank of England points to 2015 rate rise, blurs guidance

LONDON Wed Feb 12, 2014 11:11pm GMT

1 of 3. Bank of England governor Mark Carney speaks during the bank's quarterly inflation report news conference at the Bank of England in London February 12, 2014.

Credit: Reuters/Dan Kitwood/pool

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LONDON (Reuters) - The Bank of England said on Wednesday British interest rates could start to rise from record lows in little more than a year as a rapid recovery brings the economy closer to operating at full steam.

Governor Mark Carney - forced to ditch a previous version of rates guidance after it was overtaken by a sharp fall in unemployment - also announced the Bank would now follow a much broader range of measures of slack in the economy in making rates decisions.

The Bank slashed interest rates to 0.5 percent at the height of the financial crisis in 2009. The economy bounced back strongly last year but remains smaller than before the crisis and Carney stressed any increase in rates would be gradual.

"The message to businesses, to households is that the Bank rate is going to follow a path that is consistent with jobs, with incomes and with spending growing in a sustainable way," he

said. "We are going to calibrate it carefully. We are not going to take risks with this recovery."

The central bank said a view in financial markets that rates could rise in the second quarter of next year - around the time of a national election - was consistent with its goal to keep inflation close to its 2 percent target.

It also pointed to market expectations that its interest rate would stand at 2 percent in three years' time, a timeframe supported by a Reuters poll of economists taken after the Bank announcement.

Sterling hit a two-week high against the dollar and British government bond prices fell after the Bank's announcement as investors added to bets on a rate hike next year.

The Bank said it will focus on 18 separate measures of the spare capacity in Britain's economy, including business surveys and the number of hours worked, something economists said would make it hard to guess the BoE's next moves.

The array of indicators contrasted with the guidance adopted by the Bank last August when it said it would consider whether to raise borrowing costs only once unemployment fell to 7 percent.

The jobless rate has since tumbled to 7.1 percent. The Bank forecast on Wednesday it will reach 6.5 percent in early 2015.

"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," the Bank said.

The Bank for the first time estimated how much slack is in the economy - around 1.0-1.5 percent of gross domestic product, lower than some other economists' estimates.

Deputy Governor Charlie Bean said rates would need to rise before the spare capacity was completely used up, or the central bank would risk being behind the curve.

The BoE's dilemma is shared with other central banks in advanced economies that are healing from the crisis. The U.S. Federal Reserve is struggling with how to scale back exceptionally stimulative monetary policy without slowing the recovery too much.


The BoE's latest approach to explaining the policy path ahead represents a partial return to the situation before the adoption of forward guidance last year. Then, economists scrutinised small changes in the Bank's inflation forecasts for signals about whether policy was too loose or too tight.

How the new estimates of slack will influence Bank inflation forecasts and its policy decisions could prove hard to predict.

Peter Dixon, an economist at Commerzbank, said spare capacity was a "nebulous concept" and markets would be hanging on the BoE's judgments. "We have more clarity about one thing, however - the Bank is determined to keep rates on hold for a long time to come," Dixon said.

A further complication is that a rate rise now looks most likely around the date of Britain's next national election in May 2015, at which public perceptions of living standards look set to be a key issue.

In the face of some critical questions from reporters about the credibility of the BoE's new plan, Carney stuck by the BoE's decision to launch forward guidance last year.

"Forward guidance is working," he said. "Expected interest rates have remained low even as the economy has recovered strongly, uncertainty about interest rates has fallen, and most importantly, UK businesses have understood the message."

The Bank revised up its growth forecast for 2014 to 3.4 percent from 2.8 percent, a much more bullish forecast than that of most economists.

Inflation has fallen unexpectedly rapidly to its 2 percent target and the Bank said it expected it to dip further to 1.7 percent by March, before hovering close to 2 percent for the next couple of years.

The Bank said it was now more pessimistic on the outlook for British productivity than three months ago, as it had failed to keep up with rises in output. Business investment was likely to pick up but increasing exports would remain a challenge.

(Additional reporting by Kate Holton, Andy Bruce, Li-mei Hoang and Paul Sandle; Editing by William Schomberg and Jeremy Gaunt)

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Comments (3)
Hale wrote:
Bank of England hints at 2015 rate rise, blurs guidance. Mr. Carney should be more reserved in German you say “klappe zu”. Interest rates determined by the classical variables like investment, inflation, and unemployment we see additional factors such as the weather and the instability of the euro. The banking reform in the euro zone will uncover many skeletons in the cupboard. Mr. Carney please do not feed speculation.

Feb 12, 2014 4:35pm GMT  --  Report as abuse
laodizea wrote:
Bravo mister Cameron the cleverest men of 30 years before undeveloped people His decision precise and right. .Bur what is interesting Mister Putin has said oil in Russia is finished And nobody killed Abramovich and others nobody put them in Hagen Court What a world! Now we all laugh at Russia without business But dance of Tatiana Volosozhar Maxim Trankov(Russia) on the music Jesus Christ Super star before Russian foreigners from Germany with silly soviet style it is Amazing that the world never seen

Feb 12, 2014 7:33pm GMT  --  Report as abuse
laodizea wrote:
It is amazing about stupidity that was brought by Tony Blair and Jewish company of Brown and Alistair Darling, satanic wife on Tony Blair from synagogue. Tony had come without a penny and became a Russian tycoon. And all shouted Hurrah Tony Lie more Crush Britain and he crushed Of Cause to crush Britain he should to bomb all buildings of London and bring tanks on the streets and he could but he was removed. Stupidity that in Russia is enormous was brought from Britain Thanks to God in power still a clever man but behind him absolutely Mongolian Miliband, each word of whom is silliness in high degree and this silliness are supported

Feb 12, 2014 8:12pm GMT  --  Report as abuse
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