BoE's Mark Carney: 'Two in Five Chance' UK Unemployment could Hit 7% in 2014

The United Kingdom's unemployment rate has a "two in five chance" of hitting 7% in 2014, the Governor of the Bank of England has predicted.

Back in August, Mark Carney promised to keep interest rates at historic lows of 0.5% until the UK unemployment rate hit 7%.

The Bank of England's quarterly inflation report was optimistic about the UK economy's rate of recovery; news that unemployment had fallen to 7.6% over the three months to September, was also released today.

The Office for National Statistics revealed the country's jobless rate fell by 0.2% from April to June 2013.

Carney said monetary policy at the bank should remain loose so as not to choke off recovery.

"We have one of the strongest recoveries at the moment in the advanced world," he said.

"We are now at the time where the recovery has taken hold and this is the point where we are in terms of slack in the economy and how businesses react to the growth in the economy."

The bank's Monetary Policy Committee predicted a 57% chance of unemployment reaching its 7% target by the end of 2015, and 68% chance of hitting that threshold at the end of 2016.

The BoE also upgraded growth to 1.6% for 2013.

Forward Guidance Necessary?

Carney said that it was necessary to maintain forward guidance to repair the breakdown in the relationship between productivity, economic growth and unemployment, precipitated by the financial crisis.

"Under the historic discussion, the question would be why haven't you raised interest rates? By providing guidance we have shifted the discussion to a focal point around the unemployment threshold," he said.

Meanwhile, Charlie Bean, deputy governor of the BoE said the point of forward guidance was to help erode the "substantial degree of slack" or shortfall in productivity in the British economy,

"It should not be as growth picks up that that you tighten policy. Policy is not related to growth rates but the elimination of slack," Bean added.

Wages versus Inflation?

The governor was challenged over the effect monetary policy was having on living standards in the UK, such as the recent debate surrounding Labour's "cost of living crisis".

Carney defended the bank's approach.

"We don't make policy for inside the Circle Line, we make it for the entire United Kingdom," he said.

"Recovery in real wages will be determined by a recovery in productivity," he said.