Investing.com - The Bank of England updated its forward guidance on interest rates on Wednesday, saying that it will not raise rates until the spare capacity in the U.K. economy has been fully absorbed.
The BoE indicated that it will keep interest rates on hold at record lows of 0.5% for at least another year, despite upgrading its U.K. economic growth forecast for 2014 to 3.4% from 2.8%.
Speaking after the bank published its latest quarterly inflation report, BoE Governor Mark Carney said the U.K. unemployment rate has fallen much faster than the bank anticipated, and will hit the initial 7% threshold “in the spring”.
In the six months since forward guidance was implemented the U.K. unemployment rate has fallen to 7.1% from 7.8%.
"Despite the sharp fall in unemployment, there remains scope to absorb spare capacity further before raising the Bank Rate," the bank said.
The bank outlined new forward guidance, saying that it will not raise rates until the spare capacity in the U.K. economy has been fully absorbed, which it does not see happening until 2015.
The bank said it would consider a broader range of indicators, including the unemployment rate, wages and productivity and business surveys when deciding to raise rates, and added that when rates rise they will do so only gradually.
Ongoing increases would then be "gradual and small", in order keep inflation close to the bank’s target of 2%.
"The actual path of bank rate over the next few years, will, however, depend on economic developments,” the bank said.
"Even when the economy has returned to normal levels of capacity and inflation is close to the target, the appropriate level of bank rate is likely to be materially below the 5% level set on average by the committee prior to the financial crisis."
Governor Carney also said the U.K. economic recovery had "gained momentum", but warned that it was "neither balanced nor sustainable".