Britain’s unemployment rate will fall much faster than previously expected due to a strengthening economic recovery, the Bank of England said today, but it stressed that it was in no hurry to raise interest rates.

In a set of new, upbeat forecasts, the central bank said unemployment could hit 7 per cent late next year if interest rates stay unchanged, around two years earlier than it expected in August.

That was when Governor Mark Carney committed to keeping interest rates at a record low 0.5 per cent until unemployment falls to 7 per cent - something the BoE predicted at the time could take three years.

Mr Carney reiterated today, however that a fall in unemployment would not be an automatic trigger for an increase in interest rates.

Some economists said the new forecasts risked confusing British consumers and businesses because of the size of the changes and differing scenarios for its jobs forecast.

Societe Generale economist Brian Hilliard said the change damaged the credibility of the forward guidance programme. “The basic message is that they got the unemployment threshold wrong.”

Mr Carney, meanwhile, sounded his most upbeat about the British economy since he took over the central bank in July.

“For the first time in a long time you don’t have to be an optimist to see the glass is half full. The recovery has finally taken hold,” he told a news conference after the bank published its quarterly inflation report.

However, the central bank stressed that its Monetary Policy Committee was not about to raise interest rates any time soon, as headwinds remained, particularly from the euro zone.

“The MPC’s intention (is) to maintain the exceptionally stimulative stance of monetary policy until there has been a substantial reduction in the degree of economic slack,” it said.

Data published earlier today showed Britain’s unemployment rate fell to 7.6 per cent in the three months to September, edging close to the Bank’s threshold.

Sterling jumped and British government bond prices fell to their lowest level in four weeks as investors adjusted to the bank’s new, shorter timeframe for when unemployment might fall to its threshold for considering an interest rate hike.

Financial markets - which were sceptical about the August unemployment forecast - had been pricing in a rise in BoE interest rates around early 2015 and those bets were unchanged after the Bank’s new projections.

The BoE issued forecasts based on different scenarios and which came to different conclusions as to how fast the jobless rate will fall, in contrast to August, when it only forecast unemployment based on constant interest rates.

If interest rates rise as the market expects, growth will be weaker and unemployment will prove slower to fall, the BoE predicted, saying that in this case its mean forecast was for unemployment to stay above 7 per cent until the end of 2016.

The BoE said that its central forecasts were now all based on market interest rate expectations, but that did not mean that it believed these rate expectations were correct.

mr Carney also faced toughly worded questions from reporters about the value of using forecasts to steer the economy back to health when they change so much.

The Canadian said that without the long-term guidance, Britain’s economy would be at risk of premature increases in borrowing costs in markets.

“Let’s say we didn’t have forward guidance in August ... the discussion would be ‘Is the Bank going to raise rates today?’ No one is asking that question today, and rightly so, because that would be foolish, that would put us in a position of taking a recovery which is finally taking hold and basically pulling the rug out from under it,” he said.

Based on market interest rate expectations, the BoE expects inflation to fall below its 2 per cent target at the start of 2015 - six months earlier than it had expected in August.

The Bank also revised up its growth forecasts for this year and next. It sees 0.9 per cent growth in the last three months of 2013, taking full-year growth up to 1.6 percent compared to 1.4 per cent forecast in August. For 2014 it expects annual growth of 2.8 per cent, compared to 2.5 per cent predicted in August.

Britain’s economic output remains well below pre-crisis levels, however, unlike in most other major economies, and the belief that there is a large amount of unused capacity in Britain is what makes the BoE want to keep rates on hold.

Unlike private-sector forecasters, most of the BoE’s Monetary Policy Committee are convinced that weak labour market productivity will rebound sharply as growth picks up, allowing rapid expansion without creating much extra demand for workers.

Britain’s unemployment rate was nearer 5 per cent before the financial crisis, and deputy governor Charlie Bean suggested last month that the 7 per cent threshold could be lowered if domestic inflation pressures appeared muted.

mr Carney said such a change could not be ruled out, but said a decision would only be made once unemployment was at 7 per cent and the BoE knew more about productivity changes.

He also said the Bank of England was watching the recovery of Britain’s housing market closely but would not be swayed into action because of a surge in prices in London, which have risen about 10 per cent over the past 12 months.

“We don’t make policy at the Bank of England for inside the Circle Line (of the London Underground). We make policy for the entire United Kingdom and we react accordingly,” he said before adding: “Clearly there are areas in the country where valuations are very elevated and are further increasing.” (Reuters)