A survey this week by Ipsos Mori for research group Markit found that 47 per cent of people expect interest rates to rise in the next 12 months, with a quarter expecting a rise in the next six. This is despite the fact that as recently as August, the Bank forecast unemployment wouldn't drop below the 7 per cent threshold at which it will consider raising rates until the summer of 2016.
Such expectations should theoretically hold back economic growth, simply because people who seriously believe rates will rise will spend and borrow less than they otherwise would; the purpose of forward guidance was to prevent this happening. Despite this, the Bank now expects a strong recovery. It forecast this week that real GDP will grow by 3.1 per cent during next year if monetary policy doesn't change.
And it signalled that it doesn't expect it to change policy soon. Bank governor Mark Carney said there's only a two-in-five chance of unemployment dropping below the 7 per cent threshold by the end of next year.
Some economists doubt this. Markit's Chris Williamson points to official data showing that unemployment in September alone was 7.1 per cent - although it was 7.6 per cent in the third quarter overall - and says the Bank's forecast "could prove to be overly pessimistic".
But Dr Carney stressed that rates needn't rise even after unemployment has fallen below 7 per cent. This rate, he emphasised, is "not a trigger for an automatic increase in Bank Rate". The Bank this week also cut its inflation forecasts, citing "persistently weak domestic pricing pressures". It now expects inflation to stay between 2 and 2.5 per cent through to the end of 2016 - which is not high enough to require higher interest rates even if unemployment does drop below 7 per cent.
Figures this week supported such optimism. They show that, excluding utility bills and university tuition fees - two things the Bank cannot control - CPI inflation is just 1.6 per cent. Other numbers show that wages rose by just 0.7 per cent in the year to the third quarter. These are consistent with the Bank's view that there is sufficient slack in the economy (for now at least) to hold down most prices even if the economy recovers.
