BOE Interest rates are staying low but no longer tagged to Unemployment

Interest rates are unlikely to rise before 2015, the Bank of England signalled on Wednesday, as it warned the economy was still too weak to support an increase.

A bullish growth assessment on Wednesday was caveated by concerns that the recovery was currently unsustainable and unbalanced. The Bank revised up its 2014 growth forecast to 3.4pc, from an estimate of 2.8pc in November. It also raised its forecasts for 2015 and 2016 to 2.7pc and 2.8pc respectively.

However, it said the UK economy was still running at around 1.5pc below its potential, and would need to make up more lost ground before it would consider raising rates from their record low of 0.5pc. The Bank said productivity was much weaker than expected, and surveys pointed to less slack in the economy.

The Bank also severed the link between the unemployment rate and an interest rate hike, switching to a broad range of measures including wage growth and business investment to assess Britain's ability to support a rate rise.

In its Inflation Report, the Bank pledged to:

• Keep rates low until the output gap narrowed further 

• Raise rates slowly even when the economy improves

• Be prepared to change course in line with economic developments

• Maintain QE at £375bn until rates rise

Although Mr Carney refused to be drawn on when the Monetary Policy Committee believed interest rates would rise, markets currently expect the Bank to hike rates in the second quarter of 2015, rising to 1.9pc by the end of 2016.

Inflation over the next two years is expected to fall and remain below 2pc, according to the Bank's latest projections.

UK unemployment has fallen rapidly since last summer. Last August, when the Bank linked a rate rise to the jobless rate, it forecast unemployment would not fall below 7pc until 2016. It now believes the unemployment rate will fall to 6.9pc by March, and 6.3pc at the end of the year.

However, the Bank's latest indicators suggested growth would continue to be driven by household consumption - which powers two-thirds of UK output - although it also expects double-digit business investment growth this year.

Household consumption is expected to rise to 3.25pc 2014, but will only be accompanied by a small increase in real wages. Meanwhile, the household saving ratio is expected to fall to 4pc in 2014 and 3pc in 2015, from around 5pc in 2013. This is below the average of 4.25pc seen in the decade before the financial crisis.