Fears that the Bank of England could hike base rates as early as next year have eased following publication of "dovish" minutes by its Monetary Policy Committee.
Concern about rising mortgage costs have been growing since the Bank revised its growth forecasts upwards and unemployment predictions downwards.
But following the latest monthly MPC minutes, published yesterday, analysts now claim base rates are unlikely to rise before the May 2015 election at the earliest.
The Bank has previously said that it will consider interest rate rises once unemployment falls to 7%, down from today's 7.6%.
It said the probability of that 7% threshold being reached by the end of 2014 is around 40%, rising to around 60% for the end of 2015, and 66% for the end of 2016.
But the Bank was at pains to point out that rates won't automatically rise once the threshold has been hit, said Ben Brettell, economics editor at Hargreaves Lansdown. "The market is factoring in interest rates rising sooner because unemployment is falling more quickly than initially expected, but the probability is that it will go back to targeting inflation instead of unemployment."
Rate setting policy at that point would depend on the outlook for inflation relative and on the need to provide continued support to output and employment, he said.
Consumer Price Inflation is currently falling, and looks likely to be close to the 2% target when unemployment reaches 7%, Brettell said. "In this situation there is no imperative to raise interest rates."
The policy of forward guidance has backfired, he said. "It was intended to provide an element of certainty about how long low interest rates would last, but instead it has intensified speculation about imminent rate rises.
"If you remove forward guidance from the equation the Bank's recent comments are extremely dovish. It will be reluctant to raise rates before 2015’s general election and even when they do start to rise it will be a number of years before they are anywhere close to pre-crisis levels.”
CML chief economist Bob Pannell said strengthening housing activity and growing economic optimism have led to speculation about an early rate rise.
"We do not currently share this view, which we believe underplays the importance that the MPC attaches to a secure recovery before raising rates."
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