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Bank of England hikes 2014 growth forecast

The Bank of England ramped up its 2014 economic growth forecast on Wednesday as Britain's recovery picks up speed, and vowed to keep interest rates low after tweaking its guidance.

LONDON: The Bank of England ramped up its 2014 economic growth forecast on Wednesday as Britain's recovery picks up speed, and vowed to keep interest rates low after tweaking its guidance.

Gross domestic product (GDP) was set to grow by 3.4 percent this year, the central bank said in its latest quarterly report. That was up sharply from an earlier estimate of 2.8 percent given in November.

"The recovery has gained momentum. Output is growing at the fastest rate since 2007, jobs are being created at the quickest pace since records began, and after four years above target the inflation rate is back at 2.0 percent," governor Mark Carney said.

Carney took charge of the BoE last August and launched the forward guidance policy, under which the BoE had stated that it will not raise record-low interest rates until the unemployment rate falls to at least 7.0 percent.

However, the bank forecast on Wednesday that the jobless rate - which has fallen more sharply than expected amid the strengthening recovery - would hit 7.0-percent in the coming months.

As a result, the BoE added it would look at a "broad range of indicators" at that point, in order to assess the health of the labour market and establish whether borrowing costs should rise.

Under the latest guidance, the bank will seek to absorb all the spare capacity in the economy over the next two to three years to allow a full recovery.

When interest rates do begin to increase, it will be a gradual and limited process, according to the BoE.

The central bank also pledged to maintain its 375-billion-pound (US$620-billion, 456-billion-euro) bond-buying stimulus programme, known as quantitative easing, until at least the first rate hike.

Interest rates have stood at a record low level of 0.50 percent since March 2009, when it also launched the vast QE stimulus to aid growth.

The bank meanwhile predicted fourth-quarter GDP growth would be revised to 0.9 percent, from 0.7 percent. It also expected the economy would grow by a robust 0.8 percent in the current first quarter.

"Forward guidance is working," Carney told journalists.

"Expected interest rates have remained low even as the economy has recovered strongly.

"Uncertainty about interest rates has fallen. Most importantly, UK businesses have understood the message."

Canadian national Carney was last month forced to dampen talk of a rate rise any time soon, following news that the unemployment rate fell faster than expected to 7.1 percent, a near five-year low point.

The bank stressed on Wednesday that borrowing costs "may need to remain at low levels for some time to come" as Britain grapples with the ongoing legacy of the financial crisis and other economic headwinds.

"If and when the time comes that the economy can sustain higher interest rates, bank rate is expected to rise only gradually," Carney said.

"For a sustained and balanced recovery, the degree of stimulus will need to remain exceptional for some time."

The BoE also predicted that 12-month inflation would remain at, or slightly below the bank's official 2.0-percent target, over the forecast period.

The economy expanded at the fastest rate last year since before the global financial crisis, growing by 1.9 percent in 2013. That was the fastest pace since 2007.

"Despite the very sharp and unexpected fall in unemployment, the MPC still sees plenty of slack in the economy that must be used up before raising bank rate," noted HSBC economist Simon Wells.

"Phase two of forward guidance offered no new targets or thresholds, but by arguing that there is a lot of spare capacity and with inflation projected to be below target 2-3 years ahead, governor Carney wanted to send a signal that rates are not moving soon."

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