By Gary Howes

The next big hurdle facing the British pound comes in the form of Thursday's Bank of England MPC decision and a host of analysts are expecting the MPC to communicate changes to the Bank's forward guidance policy.

Faced with the prospect of an economy that is recovering at a quicker than expected pace the Bank has to act. The question is how will it act and how can it fiddle with its Fordward Guidance policy?

Berenberg Bank's Chief UK Economist Rob Wood gives his suggestions to Mark Carney and the team:

Snowballing UK recovery

It is always hard to pick the precise point at which a recovery will start. But once animal spirits return, as they did last summer, growth can snowball. Business confidence is booming. We forecast growth of 3.0% in 2014 and 3.3% in 2015, above consensus of 2.4% for both years.

Unemployment threshold likely to be breached by mid-2014

Under forward guidance, the Bank of England (BoE) will not consider raising interest rates until unemployment reaches a threshold of 7.0%.

One option is to double down on guidance

The BoE could respond to faster-than-expected unemployment falls by lowering their unemployment threshold to 6.5%. But that would make a mockery of a policy meant to provide clarity about interest rates. If the threshold can be lowered once, it can be lowered again, or raised for that matter.

6.5% is also not far from the 5.4% average unemployment rate in the two years before the crisis: That is presumably why the BoE picked 7.0% as a threshold in the first place: they need to start applying the brakes before they reach their destination.

Let forward guidance wither away

They should be congratulated rather than castigated for trying different ways of getting the economy moving. But when the threshold is reached, guidance should be allowed to die a quiet death. That would mean returning to the (not so old) world of targeting inflation.

No immediate rate hike when the threshold is breached

We expect the first hike in Q1 2015. Once the threshold is breached, the BoE can return to targeting inflation. And there is little inflationary threat right now, giving the BoE room to wait before hiking. The February Inflation Report is a likely time for further explanation.

The BoE will probably introduce a form of words similar to the Fed – that interest rates will be on hold past the 7.0% threshold – to soothe the transition. The bottom line though is that that interest rates will likely rise sooner than the BoE has been arguing.

Use macroprudential tools

The BoE should quickly start using its new tools to calm the housing market, giving space to keep interest rates low. They should recommend the immediate cancellation of the Help-to-Buy scheme, but that is politically difficult. Realistically those tools will only buy time, so a rate hike will be needed before too long.