BANK of England governor Mark Carney will update his guidance on interest rates this week as a new report considers the implications of Britain’s strengthening recovery.
The bank’s quarterly inflation report is widely expected to include an improved projection for unemployment, suggesting it could fall below 7 per cent sooner than expected.
That is the level at which policymakers have agreed they will consider an interest rate hike, and the report – which will be published on Wednesday to coincide with a press conference from the governor – is seen as the best indication of when that might happen.
The last inflation report in August predicted unemployment would not reach 7 per cent until at least the middle of 2016.
It was seen at the time as cautious, and both official figures and leading indicators have shown that the economy has stepped up a gear since. Economists now expect the 7 per cent level to be breached in 2015.
Philip Shaw, economist at Investec, said the London market is already pricing in a rate rise as early as spring 2015, so a negative reaction on the stock market to a revision of the bank’s figures is not guaranteed.
He added that lower unemployment projections do not necessarily mean the bank’s monetary policy committee (MPC) will seek to raise rates earlier.
“The MPC has warned repeatedly that its 7 per cent unemployment threshold should not be deemed to be a trigger for a rate increase, but a point at which it will look more closely at the arguments for increasing the policy rate,” he said.
Howard Archer, chief UK economist at IHS Global Insight, also expects the MPC to remain cautious.
He said: “Despite the ongoing encouraging news on the economy, any change in interest rates still looks a long way off, whether or not unemployment ends up falling more rapidly than the Bank of England had expected in August.
“There have been frequent indications from Carney and MPC members that the bank wants to give the economy every chance to develop sustainable decent growth and not to risk choking it off by any premature increasing of interest rates.”
Archer does not expect the Bank of England to raise interest rates because of any triggering of the “knockout” clauses relating to inflation and financial stability.
However, Carney may face calls to lower the unemployment threshold at which a rate will be considered, in order to further reassure investors of his growth-friendly credentials.
This is already a point of debate in the United States, where the Federal Reserve has a 6.5 per cent target on the jobless rate before it seeks to raise rates.
A recent report from investment bank Goldman Sachs suggested the US threshold could be cut to 6 per cent once Janet Yellen takes the helm at the Fed next year.