Bank of England governor Mark Carney has signalled that the UK economic recovery had “finally taken hold” but sought to allay fears that the better prospects would mean interest rates rising sooner than expected.
Markets were not reassured however and shares fell, the pound rose and borrowing costs increased on the assumption that a rise would come more quickly - prompting claims that the “forward guidance” policy linking interest rates to unemployment had backfired.
The report said this year would see gross domestic product (GDP) grow 1.6 per cent, up from a previous 1.4 per cent forecast, and Mr Carney said unemployment would fall to a key threshold of seven per cent earlier than had been thought.
Mr Carney hailed low inflation, jobs being created at a rate of 60,000 a month and the strongest rate of improvement in six years.
The current quarter was expected to see growth of 0.9 per cent and the growth forecast for 2014 was upgraded from 2.5 per cent to 2.8 per cent.
Meanwhile predictions for inflation - currently at 2.2 per cent - were revised downwards, with the Bank expecting it to fall to around its two per cent target “over the next year or so”.
Mr Carney said: “For the first time in a long time, you don’t have to be an optimist to see the glass as half full. The recovery has finally taken hold.” But the governor was faced with having to assuage fears of an interest rate rise, just three months after announcing the forward guidance pledge designed to provide reassurance to businesses and households about the cost of borrowing.
Policymakers have pledged not to raise rates from the current historic low of 0.5 per cent before the jobless rate falls to seven per cent, so the better jobs picture fuelled market fears that they would go up sooner than previously believed.
The latest report predicted that there was now a more than 50 per cent chance of the threshold being met by the third quarter of 2015, against the Bank’s expectation at the time of the previous report.