Bank of England's Carney to tread fine line on growth, rates

LONDON Tue May 13, 2014 7:04pm EDT

Bank of England governor Mark Carney leads the bank's quarterly inflation report news conference at the Bank of England in London February 12, 2014. REUTERS/Dan Kitwood/pool

Bank of England governor Mark Carney leads the bank's quarterly inflation report news conference at the Bank of England in London February 12, 2014.

Credit: Reuters/Dan Kitwood/pool

LONDON (Reuters) - Bank of England Governor Mark Carney faces a difficult balancing act on Wednesday when he will try to acknowledge Britain's strong economic recovery without adding to expectations of an early rise in interest rates.

Britain is set for economic growth of about 3 percent this year, faster than any other big, industrialized nation, and house prices have jumped by about 10 percent over the past 12 months, raising fears of a new property bubble.

But the economy is only just recovering its size of before the financial crisis, having taken far longer than most of its peers to get growth going again.

The BoE says it believes the recovery can continue apace without pushing up inflation.

It is due to publish new economic forecasts and Carney will hold a news conference at 0930 GMT.

An hour earlier, data is expected to show unemployment fell again in the three months to March and earnings outpaced inflation as the labor market gathered more strength.

Pressure is growing on Carney to show that the Bank will not raise its record-low borrowing costs too late. Economists say at least one of the BoE's nine policymakers may vote for an increase in rates in the coming months.

"We think there are risks that the (news) conference will reinforce the view that rates could even rise this year," economists at BNP Paribas said in a note to clients last week.

The Bank has struggled in its attempts to give a clear signal on when it might start to reverse its huge stimulus.

Last August, shortly after Carney took over, it launched its forward guidance policy, saying it would not think about raising rates until unemployment fell to 7 percent. But that threshold was hit in just six months, much faster than the BoE had expected. In February, it announced a new, less specific version of guidance, based on spare capacity in the economy.

At that time, the Bank showed it was comfortable with expectations in financial markets that a first hike could come in the second quarter of 2015.

Economists now think it is likely to signal that investors' bets on the first three months of next year - shortly before a British national election - are not unreasonable.

Some economists say a first hike could come in the fourth quarter of this year, the kind of speculation which has helped push the pound to a nearly five-year high against the dollar.

HOW MUCH SPARE CAPACITY?

Key to the Bank's position is its view that there is enough spare capacity in the economy, especially the labor market, to allow the recovery to build further. Inflation is currently at a four-year low, helping the BoE's case.

Economists will be watching closely for any change to the Bank's estimate that the amount of spare capacity in the economist is equivalent to between 1 and 1.5 percent of gross domestic product.

A Reuters poll published on Monday showed most economists thought that range was still about right but some expected it would be lowered, in recognition of the speed of the recovery.

Carney is also expected to nod to the speed of the recovery in the housing market but stress that the Bank's first line of defense against the risk of a property bubble is not a rate hike. Instead, the BoE is expected to take measures in June to exert more control over mortgage lending.

(Editing by James Dalgleish)

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