Updating the Bank of England forward guidance

Interest rates could be higher sooner than expected, after a better than expected fall in the unemployment rate.

Did you expect that?

Only three months after new Bank of England governor Mark Carney issued ‘forward guidance’ about monetary policy, we could see unemployment fall to its target level up to 18 months earlier than previously forecast.

These comments were included in the latest quarterly inflation report from the Bank of England.

“In the United Kingdom, recovery has finally taken hold. The economy is growing robustly as lifting uncertainty and thawing credit conditions start to unlock pent-up demand.”

This is generally good news; the UK economy is recovering well, unemployment is falling and inflation is also lower.

But for those with mortgage debt, the prospect of higher interest rates before the benefits of a stronger economy are experienced will no doubt be worrying.

It is only the most optimistic forecast from the Bank of England which now points to a rate rise next year. They only give this a two in five chance of happening.

We are more likely to see interest rates starting to rise in 2015, with a three in five chance, or 2016, with a two in three chance.

Unemployment in the UK has fallen to 7.6% from 7.8% this month, and the Bank of England will not consider an interest rate hike already it falls to 7% or below.

In our opinion, interest rates will stay lower for longer.

The Bank of England says price inflation might fall below 2% at the start of 2015, but with global demand for goods and services growing, we feel this is unlikely.

The banks are addicted to cheap and easy money, so any premature interest rate rise could have disastrous consequences for the UK economy.

Watch this space, but don’t pay too much attention to the headlines which suggest an interest rate rise in 2014.

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