UK interest rates may rise as recovery finally takes hold

Bank of England governor Mark Carney has signalled interest rates may be raised sooner than officials previously forecast as the UK economy recovers “robustly” and inflation slows.

The unemployment rate is more likely than not to reach the 7% threshold, when the BoE might start thinking about increasing borrowing costs from a record-low 0.5%, in the third quarter of 2015, the central bank said in its quarterly inflation report yesterday. It previously didn’t see that happening until the second quarter of 2016.

“You don’t have to be an optimist to see the glass as half full,” Mr Carney told reporters at a press conference. “The recovery has finally taken hold.”

The pound strengthened and gilts fell after the BoE report as well as data showing that unemployment fell to 7.6% in the third quarter, the lowest since 2009. Mr Carney tried to temper the more optimistic outlook by saying 7% is a “staging post” and not an automatic rate-increase trigger, promising that policy will remain loose until the Monetary Policy Committee is certain the recovery is assured.

“When the threshold is reached, the Monetary Policy Committee will set policy to balance the outlook for inflation against the need to provide continued support to the recovery.”

The UK’s recovery is prompting investors to raise bets on interest-rate increases, even as other central banks focus on reflating their economies six years after global markets seized up.

The ECB surprised investors last week when it cut its benchmark rate to a record 0.25%. In the US, Federal Reserve officials have stressed their intention to keep their target for short-term rates near zero.

The BoE kept its benchmark unchanged last week. The central bank sees quarterly annual economic growth of 2.6% at the end of next year and averaging about 2.5% through much of 2015.

“With the recovery taking hold, our task is now to secure it,” Mr Carney said.

“Quarterly growth rates are likely to ease back a little next year. And over the forecast horizon, growth is likely to remain modest compared with past recoveries.”

*Bloomberg