When will interest rates rise? Bank says unemployment target could be hit in 2015 – but that still may not trigger an increase

The Bank of England has stated that the stronger than expected recovery could see the 7 per cent unemployment benchmark for considering a rise in interest rates arrive sooner.

In its latest Inflation Report, the Bank said that the ‘stronger near term outlook’ meant that ‘unemployment was likely to fall more quickly than anticipated in August’ – on the same morning that this was issued unemployment ticked down to 7.6 per cent from 7.7 per cent.

But while the outlook for when unemployment may fall to 7 per cent has been brought forward from late 2016 to early 2015, crucially the Bank highlighted this would not automatically trigger the base rate rising from its record low 0.5 per cent.

The Inflation Report said: ‘The Committee reiterated that reaching the unemployment threshold would not necessarily trigger an immediate policy response. Rather the setting of policy at that point would depend on the outlook for inflation relative to the target and on the need to provide continued support to output and employment.’

The Bank added that its forecasting worked on the basis that rates would not go up at this point.

The Inflation Report said: ‘In that regard, the Committee noted that its projections conditioned on the assumption that Bank Rate remained at 0.5% implied that no policy action was taken when the unemployment threshold was reached.’

A growing divide emerging on when a rise would come had led to suggestions forward guidance conditions could be changed in the November Inflation Report – just three months after they had been first laid out.

This forward guidance said that the bank would consider raising rates when unemployment fell to 7 per cent, with knockout clauses in case unless runaway inflation looked likely or there was a threat to financial stability. It expected the unemployment condition to be met in late 2016.

Money markets had suggested that a rise would come slightly sooner than the Bank thought – after a spike to a whole year earlier in late summer – while a growing band of economists had forecast a first base rate increase as early as 2015.

Base rate was held once more at 0.5 per cent last week, while this week inflation fell to 2.2 per cent in October from 2.7 per cent in September and today unemployment eased to 7.6 per cent in October from 7.7 per cent the month before


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