Britain's economy returning to normal

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Associated Press

Posted on May 14, 2014 at 8:04 AM

Updated Wednesday, May 14 at 8:07 AM

LONDON (AP) — The Bank of England dampened expectations Wednesday that interest rates in the U.K. will be raised imminently as Governor Mark Carney said the country's economy has only begun heading back to normal.

While unveiling the bank's quarterly economic projections Wednesday, Carney was cautious, noting that despite positive news — including a drop in the unemployment rate to its lowest level in five years — progress must be made in closing the level of spare capacity in the economy. The British economy is still smaller than it was in 2008 following a deep recession brought on by the global financial crisis.

"As time has moved on and the recovery has been sustained, the economy has edged closer to the point at which bank rate will need gradually to rise," Carney said. "The exact timing will inevitably be the subject of considerable speculation and interest."

Even when that's achieved, Carney said borrowing rates will most likely rise only gradually. The bank's benchmark interest rate stands at a record low level of 0.5 percent. It has stayed there for over five years.

Carney, who hails from Canada, resorted to a sporting analogy to explain his logic, comparing the British economy to the international soccer championship —the World Cup.

"Securing the recovery is like making it through the qualifying rounds of the World Cup. That is an achievement, not the ultimate goal," he said to the amusement of reporters. "The real tournament is just beginning and its prize is a strong, sustained and balanced growth." The World Cup, in which England is grouped with Costa Rica, Italy and Uruguay, begins in Brazil on June 12.

"While it is questionable how much input Carney had into creating this analogy (surely he is more of an ice hockey guy??), it was used to great effect by the governor who had a difficult balancing act: how to juggle acknowledging the strength of the economic recovery with his desire to keep interest rates low," said Kathleen Brooks, research director at Forex.com.

As a result, the pound dropped trading 0.4 percent lower at $1.6769. The prospect of low interest rates remaining low for longer can weigh on a currency.

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