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UK unemployment rate falls to 7.1% UK unemployment rate falls to 7.1%
(about 2 hours later)
Britain's unemployment rate has fallen more sharply than expected, to 7.1%, leaving it only just above the 7% level at which the Bank of England has said it will consider raising interest rates from their record low of 0.5%. Britain's unemployment rate has fallen more sharply than expected, to 7.1%, leaving it only just above the 7% level at which the Bank of England has said it will consider raising interest rates from their record low of 0.5%.
The shock fall in the jobless rate in the three months to November was far bigger than economists had forecast, with most expecting it to edge lower to 7.3%. It compares with 7.4% in the three months to October. The shock fall in the jobless rate in the three months to November was far bigger than economists had forecast, with most expecting it to edge lower to 7.3%. It compares with 7.4% in the three months to October, and was the biggest quarterly fall since comparable records began in 1997.
The figure piles further pressure on Bank of England governor Mark Carney to clarify his "forward guidance" policy in interest rates. Carney announced last year that the Bank would consider a rate rise once the unemployment fell to 7%. Interest rates have been at 0.5% since March 2009. Economists said there would be no rate rise in the near future, however, as Bank policymakers wait for a pickup in wage growth and a more broad-based recovery before increasing borrowing costs and risk derailing a recovery. This view was reinforced in the minutes of the January meeting of the Bank's monetary policy committee, which were also published on Wednesday.
When the governor first revealed his forward guidance plan last summer, the Bank was not expecting the rate to drop to 7% until 2016. Since then, the Bank has updated its view, but its most recent forecast suggested the rate would not be reached until the second half of 2015. The committee, led by governor Mark Carney, acknowledged the jobless rate was likely to hit 7% "materially earlier than previously had been expected" but, given the unexpected fall in inflation to 2% in December, members "saw no immediate need to raise Bank Rate even if the 7% unemployment threshold were to be reached in the near future".
That forecast now looks wildly out of date, and Carney can expect some tough questions when he presents the Bank's updated forecast when the February inflation report is published next month. The Bank is instead expected to lower the guidance threshold to 6.5% unemployment when it publishes its next quarterly inflation report in February. Economists said the Bank might also opt to include an additional condition based on wage growth.
James Knightley, economist at ING, said: "There is the clear threat that the 7% threshold is breached in the next month or two and with GDP in our view likely to hit 3% this year the probability of an interest rate rise in 2014 is increasing. "However, wage pressures remain non-existent and with inflation looking as though it will be well behaved this year the BoE will likely continue to play down the prospect of actual policy tightening until they think this situation is changing." Office for National Statistics data on Wednesday showed that while the jobless rate fell, the rise in average weekly earnings was unchanged at 0.9% in the three months to November. People in the UK earned £447 a week on average in November, before tax and excluding bonuses.
Andrew Goodwin, senior economic adviser to the EY Item Club, said the surprise drop in unemployment was "the final nail in the coffin of the 7% threshold".
When Carney announced his new "forward guidance" policy last summer, the Bank was not expecting the rate to drop to 7% until 2016. The Bank has since updated its view, but its most recent forecast suggested the rate would not be reached until the second half of 2015.
That forecast now looks wildly out of date, likely forcing Carney to adjust his forward guidance policy just six months after it was unveiled.
In the Bank minutes the committee noted that risks to the recovery "would persist for some time yet", while inflation was expected to remain subdued.
"Consequently when the time did come to raise Bank Rate, it would be appropriate to do so only gradually."
The Item Club expects interest rates to stay at 0.5% – where they have been since March 2009 – until the second half of 2015.
"By then, we expect the recovery to have broadened out into exports and investment and real wages should be growing again. The consumer needs that time to get its breath back following all the heavy lifting undertaken in recent quarters," said Andrew Goodwin.
The total number of people out of work fell to 2.32 million people in the three months to November, from 2.39 million, and the youth unemployment rate fell to 20% from 20.5%.
Employment meanwhile increased to 30.15 million from 30.09 million in the previous three rolling months.
The prime minister tweeted: "More jobs means more security, peace of mind and opportunity for the British people."
The number of people claiming jobless benefits in the UK also fell by 24,000 to a near five-year low of 1.25 millon in December.
The employment minister, Esther McVey, said: "It's clear that the government's long-term economic plan to get people off benefits and into work so they can secure their future is proving successful."