British central bank still on track for earlier than expected rate rise

The Monetary Policy Committee (MPC) of the Bank of England (BOE) voted 9-0 to keep the bank rate at 0.5 percent, according to minutes released Wednesday, but many economists still believe that interest rates may rise earlier than forecast by the central bank. The BOE said in its minutes that growth is likely to be stronger and unemployment lower in the second half of 2013 than it predicted in August, when it announced its first ever forward guidance policy. That policy will see the bank rate remain at the historic 0.5 percent low until unemployment hits 7 percent (currently 7.7 percent), when a review of the rate will be triggered. The policy was introduced under new governor Mark Carney, and the better-than-expected performance of the British economy is leading markets to expect a rate rise in late 2014 or early 2015 rather than the early 2016 forecast by the BOE. The British economy has struggled for growth since recovering from the financial crisis, and it grew only 0.1 percent last year. This year growth has been 0.4 percent Q1 and 0.7 percent Q2, both confounding the predictions of economists. Figures due out on Friday for Q3 are expected to show growth of 0.7 percent, annualised at 4 percent. James Knightley, chief UK economist with ING, said, "With the economy having created over a million jobs in the past three years, the pool of available labor is starting to shrink, which should eventually start to put upward pressure on wages." He added, "Furthermore, with the economy likely to have expanded close to 4 percent annualised in 3Q12 and with lead indicators pointing to a decent start for the fourth quarter we see the strength in the labor market continuing. As such we still feel policy tightening could start in early 2015, much earlier than the 2016 date suggested by the BOE's current forecasts." The MPC hinted that policy tightening might begin sooner than it had indicated in its August Inflation Report, the first of Governor Carney's term in charge. Simon Hayes, chief UK economist with Barclays Economics Research, said that in the August Inflation Report the MPC had projected GDP growth of about 0.5 percent per quarter in the second half of the year. He said the BOE's latest estimate was around 0.7 percent per quarter, or perhaps a little higher as, taken at face value, the business surveys pointed to growth of about 1 percent per quarter. At the same time, the MPC had forecast the Q3 unemployment rate to be 7.8 percent whereas the September outturn had been 7.7 percent. Hayes said, "The minutes stated that 'it now therefore 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'." "We should therefore expect the MPC to bring forward its guidance on the likely timing of the 7 percent unemployment rate threshold being hit when it updates its projections in November," Hayes added.