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UK unemployment rate falls to 7.1% UK unemployment rate falls to 7.1%
(about 5 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%. The Bank of England sent a clear message that it has no immediate plans to raise interest rates, despite a shock fall in the unemployment rate close to the level at which the Bank said it would consider a hike.
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. Policymakers sought to ease fears of a rise after Britain's jobless rate fell sharply to 7.1% in the three months to November from 7.4%. It was a far bigger drop than economists were expecting, with most forecasting a modest fall to 7.3%.
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. Ian McCafferty, a member of the Bank's rate setting Monetary Policy Committee (MPC), said that although economic recovery was underway and unemployment was falling, inflation was back at the Bank's 2% target, easing the pressure to raise rates.
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". "It is therefore worth restating that the 7% unemployment level is only a threshold, not a trigger, and that the MPC sees no immediate need to increase interest rates even if 7% were to be hit in the near future," he said in a speech in Nottingham on Wednesday evening.
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. His comments reiterated those in the minutes of the MPC's January policy meeting, which showed there would be no rush to raise rates. The committee said that when the time did come to raise rates, it would do so "only gradually".
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. It suggested it would not raise rates until the Bank it had seen a pick up in wages growth and a more established recovery. Economists including those at the EY Item Club are not expecting a hike before mid 2015. Interest rates have been at an all-time low of 0.5% since March 2009.
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". "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, senior economic adviser to the Item Club.
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. When the Bank's governor Mark Carney announced the introduction of so-called "forward guidance" on rates last summer, he was not expecting the jobless rate to fall 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. In reality it now looks possible it will fall to that level next month.
That forecast now looks wildly out of date, likely forcing Carney to adjust his forward guidance policy just six months after it was unveiled. Economists said the Bank's next move would most likely be to announce a change to its forward guidance policy when it next updates its forecasts in the February inflation report, possibly by lowering the threshold to 6.5% unemployment and introducing a supplementary wage rise measure.
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. "Overall we gain the impression that the MPC does not want to raise rates soon and that (perhaps) it will bring its unemployment threshold down, possibly next month," said Philip Shaw, economist at Investec.
"Consequently when the time did come to raise Bank Rate, it would be appropriate to do so only gradually." The total number of people out of work in Britain fell by 167,000 to 2.32 million in the three months to November according to the Office for National Statistics data.
The Item Club expects interest rates to stay at 0.5% – where they have been since March 2009 – until the second half of 2015. The number of people claiming jobless benefits in the UK also fell by 24,000 to a near five-year low of 1.25 million in December.
"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."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."
Employment meanwhile jumped by 280,000 to 30.15 million – the biggest quarterly rise since records began in 1971 – driven mainly by a rise in people with full-time work.
Commenting on the increase, David Cameron said: "More jobs means more security, peace of mind and opportunity for the British people."
Despite the rise in employment, wage growth was flat at 0.9% between September and November, less than half the current 2% rate of inflation. People in the UK earned £447 a week on average in November, before tax and excluding bonuses. People worked an average 32.2 hour week over the three months, compared with 31.1hours in the previous quarter.
MPC members said the slow pace of wage growth in the UK appeared to reflect weak growth in productivity, the January minutes showed.