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Bank of England sees 'uncertainties' in recovery

Wednesday, 20 Nov 2013 | 4:56 AM ET
Chris Ratcliffe | Bloomberg | Getty Images

The Bank of England's (BoE) monetary policy committee (MPC) expressed "uncertainties" over the durability of the U.K.'s economic recovery, minutes of its last meeting revealed on Wednesday.

The cautious tone of the minutes - which comes despite the BoE updating its growth, inflation and unemployment forecasts last week - could serve to damp expectations by some analysts of a rate hike in early 2015.

"There were uncertainties over the durability of the recovery and the extent to which supply growth would keep pace with demand. There were also risks surrounding wage and price-setting," the minutes said.

"With the proviso that medium-term inflation expectations remained sufficiently well-anchored, the projections for growth and inflation under constant Bank Rate underlined that there could be a case for not raising Bank Rate immediately when the 7 percent unemployment threshold was reached."

(Read more: BoE upgrades growth forecasts as recovery takes hold)

The bank has previously given guidance that it would not consider raising the main interest rate (Bank Rate) from its current 0.5 percent until the jobless rate falls to this level.

Melanie Baker, U.K. economist at Morgan Stanley, told CNBC that when the 7 percent jobless target is met the BoE could re-set its so-called "forward guidance", which appears to be successfully managing peoples' expectations.

"The MPC have made a fair point: if we weren't in an environment with this specific forward guidance... people would be thinking that rates could rise much sooner than they are at present, given the seer strength of some of the incoming data."

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Wednesday, 20 Nov 2013 | 4:35 AM ET
Melanie Baker, U.K. economist at Morgan Stanley, explains that the key thing to look for in the Bank of England's minutes is a sense that a rise in interest rates "won¿t happen anytime soon."

Howard Archer, chief U.K. and European economist at IHS Global Insight, said the minutes supported the view that the BoE remained in "no hurry whatsoever" to raise interest rates..

"The Bank of England is stressing that significant growth headwinds persist, there is still a lot of slack in the economy and conditions are yet to fully normalize," he wrote in a note following the publication of the minutes.

"It is clear that the Bank of England wants to give the economy every chance to develop sustainable decent growth and not to risk choking it off by any premature increasing of interest rates."

All nine members of the MPC voted to keep the main interest rate and bond-buying purchase target unchanged.

(Read more: Bank of England: 2014 rate rise very unlikely)

The minutes also downplayed the recent rise in inflation expectations. Last week, official figures revealed that the cost of living for Britons had fallen to its lowest level for more than a year, as inflation fell to 2.2 percent in October from 2.7 percent in September.

This is significantly below the 2.9 percent rate previously forecast by the BoE for the fourth quarter.

"Some indicators of inflation expectations had risen. But these moves were thought to be of little economic significance," the minutes said.

"Moreover, there were few indications that higher inflation expectations were currently a major consideration in wage demands or companies' planning assumptions, and the lower rate of inflation might itself reduce expectations. Overall, the Committee judged that medium-term inflation expectations remained sufficiently well anchored."

In its latest quarterly Inflation Report, published last week, the BoE updated its growth, inflation and unemployment forecasts amid an increasingly rosy picture of accelerating growth, falling inflation and a four-year low in unemployment.

(Read more: UK economy should beware 'weapons of mass distraction')

The bank said the U.K. could see 7 percent unemployment as early as the last quarter of 2014, if interest rates stay low -- two years earlier than it had expected in August.

But Archer added: "Despite its lower unemployment and improved growth projections, the Bank of England is stressing that its new forecasts do not necessarily mean that it expects to start raising interest rates in late 2014 or early 2015."

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