Carney Signals Rate Increase Possible in 2015 as U.K. Recovers

Bank of England Governor Mark Carney signaled that officials may consider raising interest rates sooner than they previously forecast as the U.K. economy recovers “robustly” and inflation slows.

The jobless rate is more likely than not to reach the 7 percent threshold, when the BOE might start thinking about increasing borrowing costs from a record-low 0.5 percent, in the third quarter of 2015, the central bank said in its quarterly Inflation Report today. It previously didn’t see that happening until the second quarter of 2016.

“You don’t have to be an optimist to see the glass as half full,” Carney told reporters at a press conference in London. “The recovery has finally taken hold.”

The pound strengthened and gilts fell after the BOE report as well as data showing that unemployment fell to 7.6 percent in the third quarter, the lowest since 2009. Carney tried to temper the more optimistic outlook by saying 7 percent is a “staging post” and not an automatic rate-increase trigger, promising that policy will remain loose until the Monetary Policy Committee is certain the recovery is assured.

“When the threshold is reached, the MPC will set policy to balance the outlook for inflation against the need to provide continued support to the recovery,” he said.

Rate Outlook

Sterling advanced against all 16 of its major peers. It rose 0.5 percent versus the dollar to $1.5980 as of 12:43 a.m. in London. The yield on the 10-year government bond rose three basis points to 2.83 percent.

The U.K.’s recovery is prompting investors to raise bets on interest-rate increases, even as other central banks focus on reflating their economies six years after global markets first seized up.

The European Central Bank surprised investors last week when it cut its benchmark rate to a record 0.25 percent. In the U.S., Federal Reserve officials have repeatedly stressed their intention to keep their target for short-term rates near zero, even as they consider whether to start cutting their $85 billion in monthly bond purchases.

“Carney had a tricky job to do, upgrading growth forecasts without tightening financial conditions,” said Peter Kinsella, a senior currency strategist at Commerzbank AG in London. “The argument is now that even if the 7 percent unemployment target is breached, that doesn’t mean rates will increase automatically.”

Growth Forecasts

The BOE kept its benchmark unchanged last week. Its unemployment forecasts are based on market expectations of a quarter point increase being fully priced in by the third quarter of 2015. On that basis, the central bank sees quarterly annual economic growth of 2.6 percent at the end of 2014 and averaging about 2.5 percent through much of 2015.

The BOE said there’s a “downside risk” to the growth outlook and an “upside risk” to unemployment because of unknown levels of economic slack.

“With the recovery taking hold, our task is now to secure it,” Carney said. “Quarterly growth rates are likely to ease back a little next year. And over the forecast horizon, growth is likely to remain modest compared with past recoveries.”

Carney introduced forward guidance in August and included three caveats linked to the BOE’s inflation target of 2 percent and financial stability. Policy makers today offered a more benign view on inflation, which rose in October at the slowest pace in about a year. They cut their near-term prediction for consumer-price increases and see them slowing to just below their 2 percent target by the first quarter of 2015.

“The near-term outlook for inflation is lower than expected three months ago, reflecting unexpectedly low outturns and the recent appreciation of sterling,” the BOE said. “The economy is growing robustly as lifting uncertainty and thawing credit conditions start to unlock pent-up demand.”

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