The Bank of England has upgraded its growth forecasts for 2015 in their latest quarterly inflation report, citing that the economy is now beginning to ìhead back towards normalî.
The bank raised its growth estimations for next year to 2.9%, up from their previous estimate of 2.7% made back at the start of the year.
However, the forecast for 2014 has remained the same, with the Bank reiterating their belief that the economy will grow by a credible 3.4% this year.
The news will be yet another boost for the government and Chancellor George Osborne, who have recently received a plethora of welcome praise from prestigious organisations such as the IMF and the NIERS.
With the next General Election less than a year away now, the IMFís estimation that the British economy will be the strongest performer of all the G7 countries will give the Conservative party a huge level of momentum heading into 2015, whilst the NIERís estimation that the country will reach the landmark of exceeding its pre-recession economic growth levels sometime next month will further reinforce their chances.
However, Bank of England Governor Mark Carney has argued that whilst the economy is ëedging closerí to the level it needs to be in order for interest rates to rise, that nevertheless a great deal of work still needs to be done in order to minimise the financial risk on personal finances when borrowing costs increase.
He also echoed his past sentiments by reiterating that any rise in rates would be ëgradualí and that he may wait to increase them for a considerable amount of time.
The Governorís remarks have however negatively impacted the value of the pound, with a number of individuals previously believing that the Bank would raise rates by the end of 2014.
“Securing the recovery is like making it through the qualifying rounds of the World Cup – it’s a real achievement, but not the end goal. The prize in the economy is sustained and prolonged growth,” Mr Carney said.
The Bank also raised its unemployment forecasts for the next two years, estimating that the nationwide unemployment rate would drop to just 5.9% by 2016, which is remarkable considering that it had made a previous forecast only last year that the unemployment rate would hover round the 7% mark for a considerable period of time.
The forecast increase came on the same day as official figures indicated that the unemployment rate in the UK had dropped to 6.8% in the first three months of this year, with the government likely to point to the data as evidence that their hard decisions and economic policies are beginning to have a positive effect on the condition of the country.
Despite the overwhelmingly positive nature of the Bankís forecasts and remarks today, they still identified that the countryís economic recovery has been undermined by considerable levels of ëslackí, meaning that it is not performing at its maximum due to a lack of investment in the UK.
The Bank highlighted that despite the fall in the unemployment rate in the country that it is still far off from its pre-recession value, and this trend has extended to the average number of working hours an employee enjoys at present as well.
Worryingly, the Bank disclosed that the spare capacity in country still stands between 1% and 1.5% of GDP, and argued that a great deal of work still needs to be undertaken to improve labour productivity in the country.
“The path of slack is uncertain, and there is a range of views on the Monetary Policy Committee. For a given growth profile, it will depend heavily on the timing and strength of the rebound in productivity growth,” the Bank said in its report.
The Bank also identified that they expect inflation to stay lower than 2% until at least 2016, which suggests that they are under no real pressure to raise interest rates anytime soon.
This stance was reiterated by Capital Economics economist Samuel Tombs, who argued that recent inflation figures and the Bankís latest report will go ìsome way to cool expectations that the Monetary Policy Committee will raise interest rates as soon as the first quarter of next year”.
“We continue to think that interest rates will remain on hold until the second half of next year, later than the markets and most economists expect,” he added.