LONDON - Bank of England governor Mark Carney says the UK recovery has "taken hold" but a return to normality would possibly take another two years as nearly one million more people are out of work than in the years before the financial crisis.
Expressing optimism that unemployment will fall sooner than it had forecast to the desired level of 7 percent, Carney said, "We judge there to be a two in five chance that unemployment will reach the 7% threshold by the end of next year, and a three in five chance that it will have done so by the end of 2015."
Releasing the Bank's latest quarterly inflation report, Carney said the GDP growth expectations for 2013 has been raised from 1.4% to 1.6% and for 2014 from 2.5% to 2.8%.
The report said: "In the United Kingdom, recovery has finally taken hold. The economy is growing robustly as lifting uncertainty and thawing credit conditions start to unlock pent-up demand."
Speaking to reporters, Carney said that while growth had not returned to normal, the glass was now "half full" and the jobless total had fallen by more than the monetary policy committee (MPC) had expected.
Reiterating the assurance given in the bank's forward guidance policy in August, Carney said, "A sustained recovery requires confidence that exceptionally stimulative monetary policy will be maintained in the face of weak foreign demand and on-going repair of household, bank and government balance sheets. Our forward guidance means the MPC will not even consider raising Bank Rate at least until the unemployment rate reaches 7%
On Wednesday, the UK unemployment rate was reported at 7.6%, down from 7.8%.
The Chancellor, George Osborne, said the report was proof the government's economic plan was working.
"Our economic plan is working and as the governor of the Bank of England says, the recovery is taking hold," said Osborne.
The chancellor added that many risks remained but the greatest risk would be if his plan was abandoned and quick fixes and more borrowing made a return.
The Bank said on Wednesday that it was not planning to raise interest rates any time soon from their current record low of 0.5%.
Even when - and if - the jobless rate reaches 7% the Bank will not automatically move to change the cost of borrowing. Interest rate decisions are traditionally used to control inflation.
"It's the nature of forecasting that part of your forecast depends onthe extent to which individuals and businesses fully anticipate the path of policy. To have a constant rate, people have to internalise the fact that rates will be that low for that period of time and so you have to take a bit of these types of forecasts constant rates forecasts with a bit of humility," Carney said.
"That said ... one can imagine a scenario where the unemployment threshold is reached, and that the best policy choice for the Monetary Policy Committee in that period of time is to keep rates at current levels because the trade-off between output and inflation is attractive, because we can keep inflation on target and we can grow the economy further."
That means the UK is expected to have one of the highest growth rates among advanced economies. It will grow faster than Germany, Japan, France and Canada next year, according to growth estimates from each country's central bank. Only America is forecast to grow faster, according to the Federal Reserve.
The Bank said inflation is also expected to fall below the Bank's target of 2% next year, to around 1.9%
The report stated that there is no obvious pressure for an interest rate rise, as this week, official figures said inflation had fallen from 2.7% to 2.2% in October.
However, house price inflation is at worryingly high levels in certain parts of the country.
Carney said this was largely affecting more expensive properties: "In terms of housing valuation, there are clearly areas in the country where valuation is very elevated."
One of the Bank's regulatory bodies, the Financial Policy Committee, is charged with looking out for signs of an overheating property market.
The chief policy director of the business lobby group, the CBI, Katja Hall, said: "The Bank's forecast confirms businesses' view that the UK economic recovery is on track.
"But there are still hurdles to overcome before growth gets back to a sustainable level, including boosting business investment and trade. "
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