UK: Recovery ‘has taken hold’ says Bank of England as it lifts growth forecasts

Bank of England Governor Mark Carney speaks during the bank's quarterly inflation report news confer

Bank of England Governor Mark Carney speaks during the bank's quarterly inflation report news conference at the Bank of England in London today. - Credit: PA

The Bank of England upgraded its growth forecast for 2013 from 1.4% to 1.6% today and announced “the recovery has finally taken hold”.

It predicts gross domestic product (GDP) improving by 0.9% in the current quarter of the year and has lifted its outlook for next year from 2.5% to 2.8%.

Unemployment is not expected to fall to a key threshold of 7% before the end of 2016 but the chances of it reaching that level sooner have increased, according to the Bank’s quarterly inflation report.

Bank governor Mark Carney hailed low inflation, jobs being created at a rate of 60,000 per month, and the economy growing at its fastest pace in six years.

He said: “For the first time in a long time, you don’t have to be an optimist to see the glass as half full. The recovery has finally taken hold.”

The report from the bank’s Monetary Policy Committee (MPC) said: “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.

“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.”

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It said this challenge underpinned the need to maintain “exceptionally stimulative” monetary policy - which includes a £375billion quantitative easing programme pumping money into the economy, and interest rates held at 0.5%.

The bank has pledged not to raise the rate before unemployment falls to 7% and its central forecast predicts that this will still be 7.1% by the end of 2016.

But the complex statistics used to predict the jobless figure show there is now a greater than 50% probability of that taking place by the third quarter of 2015, brought forward from the second quarter of 2016 forecast in the last report.

Mr Carney said: “The MPC now expects the 7% threshold to be reached earlier than we did in August.”

The mixed picture appears on one reading to bring the bank closer to the thinking in the markets, which have been sceptical about the timetable for interest rate rises, and expect them to go up in 2015.

But the central forecast for unemployment extends the period at which it will remain above 7% to the fourth quarter of 2016, suggesting interest rates remaining at their present level until 2017.

Official figures released at the same time as today’s report showed this now stood at 7.6%.

The report also said that inflation had been lower than expected and was on course to fall back to around its 2% target “over the next year or so”. Figures yesterday showed it fell to 2.2% in October, a 13-month low.

The bank warned that despite the improvement in the economic picture, the turbulence of the last few years would leave lasting damage.

It said: “Despite growth becoming entrenched, the legacy of adjustment and repair left by the financial crisis means that the recovery is likely to be subdued by historical standards.”

Capital Economics said the report provides some support for market expectations that interest rates could rise some time in 2015, rather sooner than the Bank of England suggested in August.

But its chief European economist Jonathan Loynes said he believed rates will remain on hold rather longer than the markets expect, primarily because inflation will remain weak.

He said: “However, we fear that Mr Carney and colleagues will have their work cut out to prevent market rates from rising further - potentially adversely affecting the economic recovery - if unemployment remains on its recent downward trend.”

John Longworth, director general of the British Chambers of Commerce, said: “The improved outlook is testament to the resilience of businesses across the UK in the face of continued economic challenges.

“With the 7% unemployment threshold now likely to be reached earlier, we hope that Mark Carney will continue to reassure the business community that this is simply an indicator and will not automatically trigger an increase in interest rates.

“Any decision to tighten monetary policy must depend on a lasting improvement in economic conditions.”