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UK economy to return to pre-crisis growth rates in 2014

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The Bank of England has upgraded growth predictions for 2013 from 1.4 per cent to 1.6 per cent, and next year’s forecasts have been upped from 2.5 per cent to 2.8 per cent.

“A recovery appears to have finally taken hold,” the Bank of England wrote in its latest quarterly Inflation Report. “The economy is growing robustly as lifting uncertainty and thawing credit conditions start to unlock pent-up demand.”

Growth wasn’t the only thing on the agenda this morning, as the Bank of England released its quarterly Inflation Report – unemployment is also expected to fall to 7 per cent by the end of next year.

There is a 40 per cent chance that unemployment could fall to 7 per cent by the final quarter of 2014. This is almost double the probability from the last Inflation Report, released in August.

“Inflation is now as low as it has been since 2009,” said Bank of England governor Mark Carney. “Jobs are being created at a rate of 60,000 per month. The economy is growing at its fastest pace in six years.”

What does this mean? Well, growth is picking up, but so will interest rates – and possibly sooner than expected. In August, the Bank of England committed to holding interest rates at 0.5 per cent at least until unemployment fell to 7 per cent, which at the time was only expected in the second quarter of 2016.

Carney will not push for interest rates to rise, however. Higher interest rates would “pull the rug from under the recovery”, he said, as it would hit the housing market hard.

“Inflation is under control, which will provide a fillip to heavily-squeezed households and help the Bank of England maintain ultra-loose monetary policy to support the economy,” says Rob Wood, chief UK economist at Berenberg bank.

“Britain is slowly but surely getting past the worst of its troubles. Domestic price pressures are subdued and we do not expect rapid consumer price rises to deal the knockout blow to the Bank of England’s forward guidance.”

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