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LONDON – British homeowners and businesses could face a rise in interest rates sooner than expected as the economic recovery is gathering pace, the Bank of England indicated Wednesday.
Governor Mark Carney said there were improvements across the board, with unemployment dropping quicker than anticipated — to 7.6 percent, according to the latest figures.
"For the first time in a long time, you don't have to be an optimist to see the glass as half full," he said as he presented the central bank's quarterly economic report.
The market took that as an indication that interest rates will rise sooner than expected. Britain's main stock index, the FTSE 100, fell 1.2 percent, the worst performer in Europe, after Carney's comments.
Even though the markets moved, investors don't expect a rise in interest rates for months, if not years. That's because the bank has vowed not to consider raising its record-low interest rate until unemployment falls below 7 percent. The latest forecasts suggest the target may be reached by the third quarter of 2015 rather than the original guess of 2016.
Carney went out of his way to say the central bank would not act prematurely.
"It is welcome that the economy is growing again, but a return to growth is not yet a return to normality," Carney said. "Nearly one million more people are out of work than in the years before the financial crisis."
He also said that hitting the 7 percent threshold would not necessarily trigger an increase in rates. He chuckled at the notion change would be that sudden, and said the bank would make it clear ahead of time what its intentions were, so as to not catch consumers off guard.
"We like to talk," Carney said with a smile.
Carney noted the recovery still faced headwinds, meaning it could yet slow down. The Bank also revised down its forecasts for inflation, which remains its primary policy concern.
As well as holding its main interest rate at a record low of 0.5 percent since 2009, the bank has pumped 375 billion pounds into the economy to keep market rates low and encourage banks to lend. Yet the British economy remains about 2.5 percent smaller than it was at the start of 2008, before it fell into the deepest recession since World War II.
Signs of life have emerged of late, notably in the housing sector, which many fear is beginning to overheat, particularly in and around London. Carney tiptoed around questions about whether he feared a housing bubble was developing.
Still, the report comes against the most favorable backdrop for the economy since the onset of the recession — having achieved two successive quarters of growth and inflation only marginally above the 2 percent target.
"Mark Carney must be thinking that being governor of the Bank of England has been a piece of cake so far!" said Howard Archer Chief UK and European economist for IHS Global Insight.