Bank of England governor Mark Carney dampened expectations of an early interest rate rise today as he warned that despite strong growth the "prize" of sustained economic improvement was yet to be achieved.
The Bank's quarterly inflation report lifted forecasts for growth next year and predicted unemployment would fall more quickly than previously thought. But Mr Carney focused on the significant "slack" still in the labour market, with 1.4 million people working part-time because they were unable to find full-time jobs.
Economists said his remarks struck a "dovish" tone, dampening market speculation that interest rates will rise before the second quarter of next year - the period when a general election will be held. However, the report acknowledged differences of opinion among the Bank's Monetary Policy Committee (MPC) on the key measure of slack or "spare capacity"- suggesting possible dissent over rates in the months to come.
Low inflation, which the Bank expects to stay at or below its target of 2% for the next few years, should take off some of the pressure for a hike. It has been helped by a 10% rise in the value of the pound since last year, keeping import prices down.
Mr Carney said the UK economy was performing strongly, with gross domestic product (GDP) close to regaining its pre-crisis level and 700,000 more people in work than a year ago. But he also pointed to risks including damage to exports from the strong pound and "muted" world growth.
Mr Carney said: "As time has moved on and the recovery has been sustained, the economy has edged closer to the point at which Bank rate will need gradually to rise."
But the governor reiterated his assurance that any such rise would be gradual and limited and that the rate "may need to stay at low levels for some time".
"Amidst the excitement that output is close to regaining its pre-crisis level we should not forget that the economy has only just begun to head back towards normal. Securing the recovery is like making it through the qualifying rounds of the World Cup. That is an achievement, but not the ultimate goal. The real tournament is just beginning and its prize is strong, sustained and balanced growth."
Mr Carney told reporters: "As we progress we will get to a welcome moment where the economy has headed far enough towards normal that there will be an adjustment in Bank rate."
He added: "The exact timing... will be a product of the evaluation of the economy. Today's not the day. There is additional slack, wasteful spare capacity that can be used up."
Today's inflation report left the Bank's GDP forecast for this year unchanged at 3.4% - ahead of most other predictions. It increased its forecast for next year from 2.7% to 2.9% but shaved expectations for 2016 from 2.9% to 2.8%.
Meanwhile, it predicted that unemployment - currently 6.8% and until recently the Bank's key measure for shaping interest rate policy - would fall to 5.9% in two years. Last year it was predicting the jobless rate would remain at 7% for some time. Unemployment is no longer the key measure by which the Bank's policymakers decide on interest rates. They have instead said that further progress must have been made towards eliminating the level of spare capacity - a more opaque indicator - before rates can rise above their current historic low of 0.5%.
The inflation report said there had been a "modest" fall in this gap since the last report in February, though it remained within the 1%-1.5% range given at that time. But it added that there was scope for making "further inroads into slack" before the first increase in Bank rate is necessary.
However, there was "considerable uncertainty" around the central estimate, with a "range of views" on the MPC - suggesting potential future dissent in coming months over when rates should rise.
Expectations for a hike have risen in recent days with markets bringing forward the likely date from the second quarter of next year to March but economists said these now looked likely to be dampened. The report appeared to spell more disappointment for savers and breathing space for borrowers, but had little to say about recent fears expressed by the Bank's deputy governor Sir Jon Cunliffe about the risks of a house price bubble.
It said that, compared with expectations at the time of the last report in February, mortgage approvals were lower while house prices were "broadly on track". In any case, policymakers have said they would rather utilise other tools to curb any property bubble before using interest rates - which are only to be deployed as a "last line of defence".
Martin Beck, senior economic adviser to the EY ITEM Club, said: "The MPC's latest Inflation Report struck a dovish tone, suggesting that those expecting an interest rate rise this year are likely to be disappointed."
Ben Brettell, economics editor at stockbrokers Hargreaves Lansdown, said: "Mark Carney continues to walk the tightrope between talking up the UK economy and dampening expectations that interest rates will rise."
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