BOE Seen Conceding on Rates as Growth Accelerates: U.K. Credit

Britain probably had its strongest economic growth in more than three years in the third quarter, paving the way for the Bank of England to concede that interest rates may have to rise sooner than it initially forecast.

Gross domestic product expanded 0.8 percent between July and September, up from 0.7 percent in the second quarter, according the median of 40 forecasts in a Bloomberg News survey. It would be the fastest growth since the second quarter of 2010. The Office for National Statistics will publish the data at 9:30 a.m. tomorrow.

Bank of England officials are preparing new quarterly forecasts, which Governor Mark Carney will present on Nov. 13. Banks from Citigroup Inc. to Nomura International Plc predict he will give ground to investors who have signaled doubts he can keep the benchmark rate at 0.5 percent for another three years by pushing up gilt yields. Carney is due to speak in London tonight.

“The forecast changes will shorten the horizon for the guidance framework,” said Michael Saunders, an economist at Citigroup in London who forecasts the first interest-rate increase will happen in 2015. “What we’ll see in the run-up to the November meeting are greater hints that the threshold for unemployment may be hit a bit earlier than expected.”

The first of those hints came yesterday, when minutes of the Monetary Policy Committee’s Oct. 8-9 meeting reported officials saying a “robust recovery” is under way and that slack in the economy is being eroded faster than forecast in August.

Faster Growth

The MPC said it “seemed probable that unemployment would be lower, and output growth faster, in the second half of 2013 than expected at the time of the August Inflation Report,” the minutes showed. Bank staff now project quarterly growth of around 0.7 percent or “a little higher,” more than previously forecast.

Under its forward guidance policy announced in August, the bank has pledged to keep rates on hold at least until unemployment falls to 7 percent, subject to caveats on inflation and financial stability.

It projected that to occur at the end of 2016, but employment growth over the summer has reduced the jobless rate to 7.7 percent from 7.8 percent. A Bloomberg survey published this month showed 21 of 34 respondents saw the rate reaching 7 percent by the end of 2015. Five of those predicted it happening late next year.

Broad Recovery

All main U.K. industries expanded together for the first time since 2010 in the second quarter, and purchasing manager surveys from Markit Economics suggest the economy picked up momentum in the third, with services leading the increase amid a resurgent housing market. Credit-default swaps insuring U.K. sovereign debt have fallen 23 percent over the past three months, the most among Group of Seven nations, as the economy heads for its fastest annual growth since 2010.

Investors betting interest rates will have to rise sooner than the Bank of England predicts have put gilts on course for their worst performance since 1994. Their 2.1 percent loss this year compares with a decline of 1.8 percent for Treasuries and 1.5 percent for German bunds, according to Bloomberg World Bond Indexes.

The debate over how fast unemployment will fall centers on productivity. The BOE argues companies will increase the output of existing workers before they hire new ones, meaning unemployment will only fall gradually.

Carney may give clues as to his current thinking when he delivers a speech at a Financial Times event at 5:45 p.m. in London. His comments will be followed by a press conference.

Incomes Squeeze

“The bank may pat itself on the back a bit if one of the reasons the economy’s doing better is because of the certainty on rates,” said David Tinsley, an economist at BNP Paribas SA in London and a former central bank official. “They’ve tied their colors to this mast, and if we get good GDP prints without improvement in the unemployment rate they won’t be raising rates.”

The squeeze on living standards may also limit any improvement in the bank’s forecasts. Consumer prices are rising four times faster than wages and further pressure is set to come after Centrica Plc, SSE Plc, RWE Npower Plc and Scottish Power announced energy price increases of about 10 percent starting next month.

“They may well revise up their growth forecasts slightly but not massively so; they aren’t going to go the whole hog and corroborate where the market is at the moment,” said Philip Rush, an economist at Nomura in London. “Either way, it seems highly likely that it won’t take as long as they’d initially expected for unemployment to fall to 7 percent.”

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