Rates to be held at historic low

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7 November 2013

Interest rates will be held at historic lows once more today, but Britain's buoyant recovery has renewed speculation the Bank of England may be forced to raise the cost of borrowing sooner than expected.

Experts believe the Bank will need to make significant revisions to its unemployment forecasts due to the strength of the recovery, which could mean rates rise in 2015 - a year earlier than the Bank first predicted under its forward guidance policy.

The pace of UK growth picked up to 0.8% in the third quarter and minutes of the Monetary Policy Committee's October meeting showed unemployment was falling and the economy recovering faster than it forecast.

A hat-trick of positive industry surveys in recent days has added to the rosy economic picture, suggesting growth has continued into October across manufacturing, construction and services' sectors.

While ec onomists forecast rates to be held at 0.5% and no change on the £375 billion quantitative easing (QE) programme in today's noon decision, attention is already turning to the Bank's inflation report next week and expectations for governor Mark Carney's forward guidance to come under further pressure.

Under the Bank's rates pledge, it said it would not consider a rise until unemployment falls to 7% - a threshold it said would not be reached until the end of 2016 in its August inflation report.

Financial markets have remained unconvinced and are pencilling in a rise in early 2015.

Alan Clarke, economist at Scotiabank, said the Bank may now be forced to shift its own forecast by as much as 18 months as the recovery gains traction.

Think tank the National Institute of Economic and Social Research (NIESR) also said this week rates could rise as soon as 2015 as unemployment falls and areas of the economy start to boom, such as the property market.

But its latest forecast on the economy suggested a slight easing in growth to 0.7% in the three months to the end of October.

Mr Clarke s aid it would only take the Bank to drop its unemployment forecast by 0.1% to bring the 7% threshold forward by more than a year.

Latest jobs figures showed the unemployment rate at 7.7% and a fall in the number of those claiming jobseeker's allowance together with surveys of employers' intentions, suggested it would drop over the rest of the year.

"It really isn't an extreme assumption for the Bank to nudge its 2015-2016 unemployment rate forecast down by just 0.1%," said Mr Clarke.

"As such, it should validate market expectations that the first rate hike is delivered in 2015," he added.

This would be seen as a blow to Mr Carney's policy, having sought to reassure households and businesses that rates will be on hold for at least three years.

But Howard Archer, chief UK and European economist at IHS Global Insight, said revisions would likely see the Bank's prediction brought forward only marginally to early 2016.

"The Bank of England will likely argue that there are still good reasons to expect unemployment to come down relatively slowly overall and it will likely not want to encourage any further bringing forward of market expectations of interest rate hikes," he said.

Mr Archer said QE was also set to remain on hold for some time, with further money printing only likely if the recovery slips considerably or if there is significant market turmoil when the US Federal Reserve finally starts scaling back its own asset-buying drive.

The Fed maintained its QE programme at full throttle last week, but the market fretted that comments in its statement suggested the door was left open to possible tapering in December or January.

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