A RISE in interest rates by 2015 moved into view yesterday, as the Bank of England signalled the UK’s recovery had “finally taken hold” and unemployment fell to its lowest in three years.
In one of the most upbeat assessments of the economy since the financial crash of 2008, Bank of England Governor Mark Carney said he now expected higher growth and continued falls in unemployment next year.
The freeze on credit was “thawing”, he declared in his quarterly inflation report, and “lifting uncertainty” over the future was bringing confidence back.
The upbeat report came as new unemployment figures, also published yesterday, showed the percentage of people out of work had fallen across the UK to 7.6 per cent, the lowest rate since 2010.
Mr Carney said this summer he would not touch the base rate of interest until unemployment fell below 7 per cent.
The Bank said there was now a 40 per cent chance that unemployment could dip below that figure by the end of next year, and a 60 per cent chance it would do so by the end of 2015.
That leaves the path clear for the Bank to begin to raise Britain’s rock-bottom interest rates, currently set at 0.5 per cent. Such a rise would almost certainly mean increased mortgage repayments for millions of British homeowners.
The Governor stressed yesterday that he would not automatically begin to increase interest rates once unemployment falls below his mark, either next year or the year after. He said there remained “significant headwinds” in the economy, including the threat of instability in the eurozone, which necessitated the exceptional measures.
Nor, he added, would the Bank be influenced by a housing boom in London, which has prompted fears of a property bubble. “We don’t just make policy for inside the Circle Line, but for the whole country,” he said.
However, the news did not stop shares sliding and the pound rising in the markets yesterday, as traders began to factor in an earlier increase in interest rates than expected.
Combined with yesterday’s better job market figures, analysts yesterday reset their own expectations for a small rise in interest rates some time in 2015.
David Nicholls, a manager at currency dealer UKForex, said: “With the UK jobless rate falling, sustained positive data on British growth and a housing market that is defying gravity, the timetable for interest rate rises is being brought forward.
“If data continues to be strong, we expect the first rate hikes to be at the start of 2015.”
Katie Evans, economist at the Centre for Economics and Business Research (CEBR), added: “The single-month unemployment rate for September fell to 7.1 per cent, suggesting that a further improvement will be seen in the next tranche of data. CEBR expects that the UK economy will continue to grow strongly next year, pushing down unemployment and justifying an interest rate rise in early 2015 – possibly sooner.”
Other business figures pointed to the Bank’s cautious approach, however, and suggested a later rise was more likely. The view that the Bank may hold off was strengthened by the most recent data on inflation, which shows a fall to 2.2 per cent.
David Kern, chief economist at the British Chambers of Commerce, said: “Carney stressed that reaching the 7 per cent threshold would not necessarily trigger a rise in interest rates, and this leads us to believe that there will be no increase until the end of 2015.”
Mr Carney’s “forward guidance” on interest rates, presented earlier this summer, had suggested that interest rates would not be rising until 2016. But since then, the bounce-back of the economy has been stronger than expected.
The Bank’s report yesterday declared bluntly: “In the United Kingdom, recovery has finally taken hold. The economy is growing robustly as lifting uncertainty and thawing credit conditions start to unlock pent-up demand.”
However, tempering over-excitement, it then added: “But significant headwinds – both at home and abroad – remain, and there is a long way to go before the aftermath of the financial crisis has cleared and economic conditions normalise.”
The report said that this fear factor “underpins” the Bank’s “exceptionally stimulative stance” on monetary policy.
The Bank’s upbeat pronouncement on economic recovery was echoed by Office for National Statistics figures, which revealed that unemployment across the UK had fallen by 48,000 to 2.47 million, leaving the rate of unemployment at its lowest in three years. The number of people claiming jobseeker’s allowance also fell by 41,700, while there are now nearly 30 million people in work, up by 177,000.
But despite the promising headline figures, there remain concerns about the nature of the recovery, with figures showing that the gap between earnings and prices is wider than last year.
Regular pay grew by just 0.8 per cent year on year in the three months to September, less than half the growth rate seen in the same period a year ago (1.8 per cent), and well below the 2.2 per cent rate of inflation. That squeeze on the cost of living was reflected in a new Populus Poll yesterday, which showed that only 11 per cent of people said they “felt part of the recovery”.
ONS data also revealed that 1.46 million people – 115,000 of them in Scotland – were working part-time because they could not find a full-time job, the highest figure since records began in 1992.
Rachel Reeves MP, shadow secretary of state for work and pensions, said: “On average, working people are more than £1,600 a year worse off under this out-of-touch government.”
However, Prime Minister David Cameron insisted: “There are now 1.1 million more people in work since the election – more proof our long-term plan for Britain is working.”
In his statement at the Bank of England, Mr Carney also sought to dampen fears that the policy of low interest rates and rising house prices was overheating the economy once again, as had been seen in the run-up to the 2008 crash.
Instead, he insisted that the housing market was being inflated by London. It comes after figures on Tuesday showed that while house prices in Scotland are falling, they are rising year on year by 9 per cent in London.
“In terms of housing valuation, there are clearly areas in the country where valuation is very elevated,” said Mr Carney.
“The greatest house price momentum is among houses in the upper value end of the market.
“We have a good line of sight on the housing market and we do look at measures of momentum and leverage and whether people are becoming over- extended.”