Bank of England upgrades growth forecast for UK economy as Mark Carney hints at rise in interest rates

Unemployment not expected to fall to key threshold of 7% before 2016

Britain's growth forecast for 2013 has been upgraded from 1.4 to 1.6 per cent, with the Bank of England announcing the UK's economic recovery has "finally taken hold".

The Bank now predicts Britain's GDP will improve by 0.9 per cent in the current quarter of the year, lifting the 2014 outlook from 2.5 per cent to 2.8 per cent.

Unemployment is not expected to fall to a key threshold of 7 per cent before the end of 2016 but the chances of it reaching that level sooner have increased, according to the Bank's quarterly inflation report.

Governor Mark Carney says "the recovery has finally taken hold".

Bank governor Mark Carney hailed low inflation, jobs being created at a rate of 60,000 per month, and the economy growing at its fastest pace in six years.

He 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."

The report from the Bank's Monetary Policy Committee (MPC) said: "In the United Kingdom, recovery has finally taken hold. The economy is growing robustly as lifting uncertainty and thawing credit conditions start to unlock pent-up demand.

"But significant headwinds - both at home and abroad - remain, and there is a long way to go before the aftermath of the financial crisis has cleared and economic conditions normalise."

It said this challenge underpinned the need to maintain "exceptionally stimulative" monetary policy - which includes a £375 billion quantitative easing programme pumping money into the economy, and interest rates held at 0.5  per cent.

The Bank has pledged not to raise the rate before unemployment falls to 7% and its central forecast predicts that this will still be 7.1  per cent by the end of 2016.

But the complex statistics used to predict the jobless figure show there is now a greater than 50% probability of that taking place by the third quarter of 2015, brought forward from the second quarter of 2016 forecast in the last report.

Mr Carney said: "The MPC now expects the 7  per cent threshold to be reached earlier than we did in August."

The mixed picture appears on one reading to bring the Bank closer to the thinking in the markets, which have been sceptical about the timetable for interest rate rises, and expect them to go up in 2015.

But the central forecast for unemployment extends the period at which it will remain above 7  per cent to the fourth quarter of 2016, suggesting interest rates remaining at their present level until 2017.

Official figures released at the same time as today's report showed this now stood at 7.6  per cent.

The report also said that inflation had been lower than expected and was on course to fall back to around its 2  per cent target "over the next year or so". Figures yesterday showed it fell to 2.2  per cent in October, a 13-month low.

The Bank warned that despite the improvement in the economic picture, the turbulence of the last few years would leave lasting damage.

It said: "Despite growth becoming entrenched, the legacy of adjustment and repair left by the financial crisis means that the recovery is likely to be subdued by historical standards."

Additional reporting PA

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