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BoE may not wait for 7 percent unemployment to hike rates - think-tank

Flowers bloom outside the Bank of England in the City of London September 19, 2013. REUTERS/Suzanne Plunkett

By Shadi Bushra

LONDON (Reuters) - The Bank of England is likely to raise interest rates in the second half of 2015, before unemployment hits the 7 percent threshold at which it has said it would consider tightening monetary policy, a leading British think-tank said on Tuesday.

The National Institute of Economic and Social Research (NIESR) forecast that Britain's unemployment rate would not drop below 7 percent until early 2016, longer than most investors think and slightly earlier than the BoE's forecasts.

Nonetheless, the central bank could hike interest rates in 2015 in order to keep Britain's economy from overheating, NIESR said in a quarterly report.

"There may be a sense that consumer spending and possibly house prices are rising in a way that makes an ultra loose policy unnecessary," NIESR director Jonathan Portes told reporters.

Britain has kept its benchmark interest rate at a record low of 0.5 percent since 2009 to underpin the economy as the global financial crisis struck.

The central bank said in August it would not consider raising rates until unemployment falls to 7 percent. At the same time, it set some "knockout" clauses that could mean it raises interest rates sooner, including in the event that Britain's financial stability is considered to be at risk.

NIESR revised its forecast for Britain's economic growth next year to 2 percent, a 0.2 percentage-point increase from August but still less optimistic than most economists' expectations.

Despite recent signs of a turnaround, Britain's economy is still smaller than it was before 2008, highlighting how hard the recession hit the country and how slow the recovery has been.

In contrast, other large industrialized economies such as the United States and Germany have already more than made up for output lost to the recession.

NIESR warned that Britain's recovery remained reliant on consumer spending and falling real incomes meant household savings were being eroded.

Rising utility prices and other household costs, meant households' real incomes, which are 6.8 percent less than in 2008, were not likely to improve in 2014, the think-tank said.

(Reporting by Shadi Bushra; Editing by Robin Pomeroy)