With the latest reports showing employment rising and credit conditions easing, the Bank of England is saying that the country's economy is 'growing robustly'.

But with any economy starting out on the road to recovery there comes a point at which the recovery turns into a boom, which needs to be controlled to prevent a big bust inevitably following on. This would involve tightening back on all that quantitative easing as well as raising interest rates. But the timing is critical or a fall back into recession may result.

In an effort to make this path clearer the Bank of England under Mark Carney adopted the policy of 'forward guidance'. Within this, as long as the economy was in a 'normal' state, if the unemployment rate fell to the 7 percent threshold (the latest is 7.6 percent) then interest rates would be raised. Previously the thoughts had been that this would be unlikely for several years (maybe by 2016), but now the possibility of that threshold being met has been brought forward.

Sasha Nugent, Caxton FX analyst, commented:

"The pickup in employment has meant that the 7% threshold needed for monetary policy to be re-evaluated may be reached sooner than 2016.

"The BoE has placed a two in five chance that the threshold will be reached by the end of next year, and a three in five chance of this being achieved by the end of 2015.

"Governor Carney has reiterated the importance of reducing slack from the economy and the need for an increase in productivity.

"When the unemployment rate has finally reached 7%, the question we may then be faced with is has the recovery been strong enough to absorb enough slack to warrant a rise in interest rates? For now though, the outlook is bright and as Governor Carney has said, we should see the glass as half full."

Bank of England (PD)Nida Ali, economic adviser to the EY ITEM Club, said:

"Given the recent economic developments, of lower unemployment, stronger growth and lower inflation, there was always going to be a shake-up in the Bank's forecasts in today's Inflation Report. But the magnitude of the revisions, particularly for the unemployment rate, were much bigger than expected.

"The Bank now expects there to be a 50-50 chance that the unemployment rate will reach 7% by the end of 2014, from their previous projection of unemployment reaching 7% by mid-2016. This is even more optimistic than our forecast, of unemployment falling below 7% by mid-2015.

"These revisions have created some confusion about the future path of monetary policy. MPC members were once again at pains to highlight that the fall in the unemployment rate, will not trigger an automatic rate rise, under the pretext that the economy has still not returned to "normal". But financial markets are unlikely to be convinced and these forecasts suggest that market interest rates will probably increase."

Comment Here!

comments