Bank hints that early rate rise possible

IN: Business news

The minutes from the Bank of England’s Monetary Policy Committee’s (MPC) October meeting suggest that a rise in interest rates could come earlier than the bank had predicted in its last Quarterly inflation Report in August.

undefinedAugust was when the Bank announced it was adopting a policy of forward guidance on interest rates linked to the unemployment rate.

The Bank said it will review the record low level of its base rate of 0.50 per cent when the unemployment rate falls from its current level of 7.7 per cent to 7.0 per cent.

There are three potential “knockout” scenarios that would override this policy.

These are if the public's medium-term inflation expectations rose to dangerously high levels, if it forecasts that inflation will be at or above 2.50 per cent in 18-24 month's time or if the record low interest rates pose a threat to the UK's financial stability.

In August’s inflation report, the Bank said it expected the rate to fall to 7.0 per cent in 2016 and that this would trigger a review but not necessarily mean an automatic rise in rates.

When rates do go up, the Bank said they will rise gradually in an ordered way.

The minutes suggest that the Bank now thinks unemployment could fall faster than anticipated.

An extract from the minutes said: “The recent reduction in the unemployment rate indicated that slack in the economy was, as anticipated, being eroded as activity picked up. If anything, that was occurring a little faster than envisaged at the time of the August Inflation Report.”

The City and financial markets have already factored in a rate rise for the third quarter of 2015 and last week, the Centre for Economics and Business Research (CEBR) said it thinks the first rate rise could come as early as late 2014.

Azad Zangana of Schroders said: "All eyes will now turn to the Bank of England which needs to provide an update on its forward guidance on interest rates."

The Bank is due to publish its next Quarterly Inflation Report on Wednesday 13th November.

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