Wed May 14, 2014 6:18am EDT
(Adds quotes from Carney, market reaction)
By David Milliken and Ana Nicolaci da Costa
LONDON May 14 (Reuters) - The Bank of England said on Wednesday it is still in no rush to raise interest rates because the recovery in the British economy remains in its early stages, suggesting it may only raise rates in about a year's time.
The central bank lowered its forecast for unemployment for the next couple of years, but left largely unchanged its growth and inflation forecasts as well as its assumptions on the timing of interest rate rises.
The pound fell to a one-month low against the dollar after the Bank's report as the markets had been betting on an earlier rate hike. British government bond prices rose.
BoE Governor Mark Carney said Britain's economy was still only starting to recover from the 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 at a news conference.
"The exact timing will inevitably be the subject of considerable speculation and interest."
He linked the progress of Britain's recovery to date to the equivalent of a country making it through the qualifying rounds for the soccer World Cup, which starts in Brazil next month.
"That is an achievement, but not the ultimate goal. The real tournament is just beginning and its prize is a strong, sustained and balanced expansion."
One topic of debate has been how much spare capacity there is in the economy, or how much more the economy can grow without feeding inflation pressures.
In its quarterly report, the BoE said the margin of spare capacity had narrowed a little but not by enough to justify an interest rate hike.
It also said that when the time came, borrowing costs would rise "only gradually and to a level materially below" their pre-crisis average."
The BoE forecast that inflation in two years' time would still be just below its 2 percent target, assuming interest rates rise in the second quarter of next year - around the time of a national election.
Strong recent data means that some analysts had been cautiously bringing forward their expectations of when the BoE will raise interest rates in recent weeks, and in recent days markets have priced in a rate move for around nine months' time.
Britain's economy looks set to grow faster than any other big industrialised nation this year, and house prices have jumped by about 10 percent over the past 12 months, raising fears of a new property bubble.
But the central bank has been keen to stress that the economy is only just recovering its size of before the financial crisis, having taken far longer than most of its peers to get growth going again.
Wednesday's BoE forecasts predict growth of 3.4 percent this year - unchanged from February - but unemployment is expected to drop faster than previously forecast, falling to 5.9 percent in two years compared to 6.4 percent in February's forecast.
The recent strengthening in sterling would cancel out the upward inflation pressure from the greater fall in joblessness and a slightly weaker productivity outlook, the BoE said.
Unemployment dropped to 6.8 percent in the first quarter of 2014, figures released earlier on Wednesday showed, and the central bank said that as in February, only an unemployment rate of 6.0-6.5 percent would start to push up inflation.
But it said that the level of unemployment that would push up inflation would decline as more long-term unemployed entered the workforce, and that in three years' time unemployment could be as low as 5.25-5.75 percent without creating price pressures.
Before the financial crisis, Britain's jobless rate averaged around 5 percent.
The central bank said that British firms were currently operating at full capacity but that significant slack remained in the labour market, with unemployment and average hours worked both below pre-crisis levels.
In February, the BoE said that this slack was in a range equivalent to 1.0-1.5 percent of gross domestic product. On Wednesday it said slack was now at a lower point in this range, though it did not give an exact figure.
"The path of slack is uncertain, and there is a range of views on the Committee. For a given growth profile, it will depend heavily on the timing and strength of the rebound in productivity growth," the BoE said.
Some economists think that at least one member of the MPC may vote for higher interest rates within the next few months. (Editing by William Schomberg and Hugh Lawson)
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