The latest minutes from the Bank of England’s Monetary Policy Committee (MPC) appear to show that an interest rate rise could happen earlier than anticipated.
Under the Bank’s policy of forward guidance on interest rates, Mark Carney said the Bank would review whether rates need to rise when the unemployment rate falls to 7.0 per cent from its current level of 7.7 per cent.
However, the latest commentary from the central bank suggests the policymakers who make up the MPC think that unemployment could fall faster than anticipated when they set the policy up in August.
The MPC thinks the recent improvements seen in the economy are reducing the slack that existed and raising levels of productivity amongst existing workers.
As this improves and demand continues to grow it will inevitable mean firms need to take on more staff to deal with the increased workload.
The MPC thinks growth will strengthen in the second half of 2013, helped by the revival in the housing market.
Improved confidence amongst households and businesses will also raise consumer spending, further supporting the growth in the economy.
This should mean that when the first estimate of GDP growth in the third quarter is published on Friday October 25th, growth should come in at least as high as the 0.7 per cent uplift seen in the second quarter. Economists predict a similar level of growth in the final quarter taking annual growth to around 2.5 per cent, the highest level seen since 2007.
Howard Archer, chief UK and European economist at IHS Global Insight, said: “Growth prospects look relatively encouraging. Business investment should increasingly kick in to support growth, having been very much the weak link in the recent recovery.”
If unemployment does fall faster than anticipated, it will put pressure on the Bank to raise interest rates earlier than the date of mid-2016 that they had anticipated.
This will cause extra financial pressure on millions of households who have been protected for mortgage rate rises for the last five years. An estimated 30,000 borrowers would fall into mortgage arrears even if rates went up by just 0.50 per cent.
If the financial markets anticipate a rate rise is coming, wholesale rates will go up which will lead to a rise in mortgage rates available to residential customers.
According to analysis by the Centre for Economics and Business Research (CEBR), the first rate rise could come as early as late in 2014, if the economy grows at an accelerated pace for the next 18 months.
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