The latest quarterly inflation report has suggested that the Bank of England could raise interest rates as early as the end of 2014 if unemployment continues to tumble and the economy improve.

Governor of the Bank of England Mark Carney said Bank statisticians foresee a 40% chance unemployment will reach the 7% threshold by the end of next year.  He added there is a 60% chance it will happen by the end of 2015.

Interest rates and unemployment

Under the terms of Carney’s Forward Guidance, the MPC will not consider raising rates until unemployment hits the 7% trigger.

He said: “Through that guidance we are giving businesses and households the confidence that interest rates won’t go up until jobs, incomes and spending are recovering at a sustainable pace.

“In line with the unexpected strength of demand, the unemployment rate has fallen a little more rapidly than expected in August. That is to be welcomed: 100,000 more people are in work as a result.”

Carney added that the unemployment threshold is a staging post for assessing policy, not a trigger for an automatic increase in Bank Rate.

“When the threshold is reached, the MPC will set policy to balance the outlook for inflation against the need to provide continued support to the recovery in output and employment,” he added.

Source: Mortgage Solutions.