Carney stated that markets still expect Bank Rate to increase, but to a more limited extent and at a more gradual pace than they did in August.
He said:
"With an increasingly well-functioning banking system, that change in market expectations is being passed through to the interest rates faced by British households and businesses. As one example, fixed mortgage rates have fallen to record lows.
"We project growth of 3.5% this year, 2.9% next year, and 2.6% for each of the following two years."
The report stated three factors that explain why the UK can continue to grow at above-trend rates in the face of subdued world demand.
The first surrounded real take home pay growth. Carney stated that 700,000 new jobs have been created in the last year and confidence is returning to the labour market.
Carney said:
"We are seeing the first tentative signs of the long-awaited pickup in wage growth. Real incomes will be further supported by lower energy, food and other import prices. Oil prices are now 20% lower than a year ago and food price inflation is at a 12-year low. The MPC expects annual real pay growth to pick up from around zero now to around 2% by the end of next year."
Second, despite a larger-than-anticipated slowing in the housing market, consumer confidence is being supported by the combination of lower effective interest rates, a strong labour market and improved pay prospects. During the transition to higher incomes, Carney stated that he expects the household saving rate to continue to drift down to relatively low levels, supporting the growth of demand.
Thirdly, investment is expected to continue growing at well above its historical average rate, reflecting expanding demand, improved credit conditions and the clarity that interest rate increases are likely to be gradual and limited.
Carney continued:
"Above-trend growth through the forecast period means that the economy will continue on its path towards normalisation. We expect unemployment to fall to pre-crisis levels and the output gap to continue to close."
According to the Committee, inflation is likely to remain close to 1% over the next year, beginning to return slowly towards the 2% target as the pass-through from sterling eases, commodity prices stabilise, wages and unit labour cost growth pick up to rates consistent with achieving the inflation target, and, inflation expectations remain well-anchored.
Nevertheless, Carney pointed out that clear risks remain and the path for Bank Rate will depend on how those risks evolve.
He said:
"The last few months have shown that markets understand that our setting of Bank Rate is data-dependent. It is appropriate that, while a tightening in monetary policy remains in prospect, markets now expect somewhat easier monetary conditions over the forecast period than was the case three months ago.
"That should not be taken as validating any particular date for the first rate increase. We have highlighted repeatedly that what really matters is the broad shape of monetary tightening over the medium term, rather than estimates of precisely when the process of normalisation will begin. The latter will continue to move around as the outlook evolves.
"When Bank Rate does begin to rise, it is expected to do so only gradually and to remain below average historical levels for some time to come. While that is an expectation not a promise, its clarity is helping businesses to plan, invest and hire despite a challenging global environment. And it is helping businesses and households to focus on their day’s work, building the economic expansion, without being overly troubled by foreign nightmares."
