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Interest rates to 'stay low', says Bank of England's Mark Carney Bank of England Governor Mark Carney warns economy has yet to reach ‘ultimate goal’ of expansion
(about 3 hours later)
Bank of England governor Mark Carney has played down speculation of an imminent rate hike, signalling that, although the economy is returning to normal, the cost of borrowing will remain at a record low "for some time". Interest rates are set to remain at record lows this year despite strong growth and further falls in unemployment, the Bank of England has signalled.
Drawing a comparison to England's performance in the World Cup, Mr Carney said the competition is just getting started and the "prize" of a sustained and balanced economic recovery is yet to be achieved. The news is likely to bolster consumer confidence and ease concerns of mortgage holders about an impending rise in the cost of their borrowing.
"Securing the recovery is like making it through the qualifying rounds of the World Cup. That is an achievement, not the ultimate goal," he said. "The real tournament is just beginning and its prize is strong, sustained and balanced growth." The Governor Mark Carney insisted at the Bank’s regular inflation press conference that the economy is not yet mended, despite the fact GDP is now close to making up the ground it lost in the 2008-09 recession. “Amidst the excitement that output is close to regaining its pre-crisis level we should not forget that the economy has only just begun to head back towards normal” he said.
The Bank of England has said that the timing of the first rate rise will depend on its estimate of the level of spare capacity in the jobs market, gauged from various measures- such as unemployment and hours worked. Likening the state of the economy to this summer’s football World Cup, Mr Carney added: “Securing the recovery is like making it through the qualifying rounds… that is an achievement but not the ultimate goal”. He said the prize was “a strong, sustained and balanced expansion”.
Today, Mr Carney signalled that "there is additional slack, wasteful spare capacity that can be used up" in the labour market, with 1.4 million people working part-time because they cannot find full-time jobs. The Bank has said its decision over when to raise interest rates from their present floor of 0.5 per cent will depend on the amount of “spare capacity” in the economy as measured by various measures of slack in the labour market. The Office for National Statistics (ONS) reported that unemployment declined by a further 133,000 in the three months to March, down to 6.8 per cent. But the Bank stressed that it still saw spare capacity of between 1 and 1.5 per cent of GDP, unchanged since its last report. The Bank now expects the jobless figure to fall to 6.6 per cent by the end of the year.
Economists said his remarks struck a "dovish" tone, dampening market speculation that rates, currently at a record low of 0.5 per cent, will rise in the second quarter of 2015 -coinciding with the next general election. Before the report, markets were pricing in the first rate rise for March 2015 and a growing number of analysts had been speculating that stronger-than-expected growth would necessitate an increase later this year.
"Despite the strength of the recovery and, in particular, the robustness of the labour market, the MPC stuck to its previous estimate that slack in the economy amounts to 1- 1.5 per cent of GDP," said Martin Beck, senior economic adviser to the EY ITEM Club, adding that he does not expect to see a rise until "well into 2015". But after the press conference traders pushed the expected date for the rate rise back to April 2015. The value of the pound also fell against the US dollar as markets responded to the Bank’s dovish message on the cost of borrowing. Sterling was also driven lower by a warning from the Governor that the “persistent strength” of the currency risked unbalancing the recovery.
In its quarterly inflation report, the Bank lifted its growth forecasts for next year and predicted unemployment would fall faster than it thought in February, falling to 5.9 per cent in the second quarter of 2017. Mr Carney conceded that the day when interest rates will need to rise to contain the threat of inflation had “edged closer” since its last report in February, but he refused to comment on whether market expectations of the timing of the first hike were justified.
Mr Carney's comments coincided with today's upbeat unemployment figures which showed the number of people in work rose to an all-time high of 30.4 million in the three months to March. The ONS also reported that real wages finally grew in March, with average total pay rising by 1.7 per cent in the three months to March. This was higher than consumer price inflation in that month of 1.6 per cent.
The Bank expects the economy to grow 3.4 per cent this year, unchanged from its February report, and 2.9 per cent next year, up from its previous estimate of 2.7 per cent for 2015. It trimmed its growth forecast to 2.8 per cent from 2.9 per cent for 2006. However, the news on earnings came as something of a disappointment since the figure was below most expectations of a 2.1 per cent rise.
The ONS’s breakdown of the jobs figures also showed that half of the 722,000 new jobs in the past year have been self-employed positions.
The Bank of England’s Monetary Policy Committee has been debating whether the rise in self-employment – which now accounts for 15 per cent of all employment – represents disguised unemployment and thus should be treated as another manifestation of slack in the economy.
The Bank’s overall growth forecast for 2014 was unchanged on its last forecast in February at 3.4 per cent. However, it upgraded its 2015 growth forecast from 2.7 per cent to 2.9 per cent.