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BoE Sees Rapid Fall In Unemployment Rate; Upbeat On Economy

Bank Of England 111313

Bank of England Governor Mark Carney said the U.K. unemployment rate is likely to reach the threshold more rapidly than expected in the light of a strong economic recovery, which has added to market expectations of an early interest rate hike.

Nonetheless, he emphasized that the fall in jobless rate to 7 percent will not trigger an automatic rate revision.

The jobless rate is more likely than not to reach the threshold of 7 percent by the third quarter of 2015, the U.K. central bank said in its quarterly Inflation Report.

In August, Carney pledged to keep interest rates at the current 0.50 percent until the unemployment rate falls to 7 percent. Today's forecast, together with strong economic recovery has further added to market expectations for an interest rate increase in 2015.

The Monetary Policy Committee attaches only around a two-in-five chance to the unemployment rate having reached the threshold by the end of 2014, the report said.

The corresponding figures for the end of 2015 and 2016 are around three-in-five and two-in-three, respectively. Earlier, the bank predicted that the threshold won't be reached until the end of 2016.

The bank reiterated that reaching the unemployment threshold would not necessarily automatically trigger an immediate policy response. As the 7 percent rate is approached, the MPC will assess the state of the economy and inflation to evolve a proper monetary policy stance.

The MPC is comfortable with the forward guidance put in place, Carney told reporters. "With the recovery taking hold, our task is now to secure it," he said.

Capital Economics Chief European economist Jonathan Loynes retains the view that interest rates will remain on hold rather longer than the markets expect as the effects of the large amount of spare capacity in the economy keep inflation low.

As widely expected, the bank raised its growth projections and lowered inflation estimates.

The economy is growing robustly as lifting uncertainty and thawing credit conditions start to unlock pent-up demand, the report said.

The bank projects 0.9 percent growth for the fourth quarter. Accordingly, the 2013 full-year growth outlook was upgraded to 1.6 percent. The BoE forecast 2.8 percent expansion for 2014.

Inflation is projected to fall a little further over the next year or so and the near-term projection is lower than expected in August, the report showed.

Inflation will be close to its 2 percent target at the end of the three year forecast period. According to the MPC, the risks around the 2 percent inflation target are broadly balanced in the second and third years of the forecast.

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