By Sarah O’Connor and Chris GilesMark Carney, the Bank of England governor, yesterday played down expectations of an imminent rise in interest rates despite figures that show the UK economy is creating jobs at the fastest rate on record.
He said the UK economy had “only just begun to head back towards normal” as he presented the central bank’s quarterly inflation report.
The jobless rate fell to 6.8 per cent yesterday and the number of people in work increased by 722,000 from last year. More jobs were created in the UK in the first three months of the year than at any time since records began in 1971.
However, many people said they were underemployed and regular wage growth was a meagre 1.3 per cent, down from 1.4 per cent a month ago.
The BoE did not change its February forecasts, which said that the economy would grow 3.4 per cent this year as it enjoys a quicker recovery than most other advanced countries.
It expects unemployment to fall faster than it did in February but the Monetary Policy Committee said it had not changed its “best collective judgment” that there was still plenty of untapped potential or “spare capacity” left in the economy.
Traders reacted by selling the pound, which fell 0.3 per cent to the dollar. Sterling took a further knock after Mr Carney said “persistent strength” in the currency would undermine the balance of the recovery.
Investors pushed back their predictions for the first rise in interest rates, pricing it in for March or April rather than earlier in the year, although that still means markets think rates will rise from their record low of 0.5 per cent before next May’s general election.
Mr Carney said interest rate rises were the “last line of defence” to deal with rapidly increasing house prices and that the BoE would first use “macroprudential” tools, ranging from tougher conditions on mortgage lending to restrictions on the amount homeowners can borrow.
Some economists were critical of Mr Carney. Michael Saunders, at Citi, said: “The governor did not . . . send a clear warning to households and businesses to prepare now for the shift to higher interest rates.” He said such a warning would reduce the risks of “super loose monetary policy” fuelling a “bubble mentality”.
The BoE forecast inflation would hover around its 2 per cent target for all of the next three years on the assumption that interest rates will start to rise in the spring of 2015.
Most members of the MPC were willing to agree there was sufficient slack in the economy to pull down inflation, although they said “the margin of spare capacity has probably narrowed a little since [February]”.
The report suggested only a modest tightening of monetary policy was needed to keep inflation in line with the bank’s target over the next three years. (FT)