Bank of England says no rush to raise rates as UK unemployment falls towards target

Wednesday 22 January 2014 19.08
1 of 2
UK jobless levels fell by more than expected in the three months to the end of November
UK jobless levels fell by more than expected in the three months to the end of November
Bank of England minutes show bank in no rush to raise UK rates
Bank of England minutes show bank in no rush to raise UK rates

British unemployment fell to very near the Bank of England's level for considering an increase in interest rates, data has shown, but the central bank stressed it would be in no rush to act.

The unemployment rate dropped to 7.1% in the three months to November.

This is marginally above the 7% which the Bank of England has said is its threshold for thinking about raising interest rates from their current all-time low of 0.5%.

The rate of 7.1% was below any forecast by economists in a Reuters poll and the lowest in nearly five years. It was down from a previous level of 7.4%.

The number of people in work in the UK also grew by a record amount, a further sign of the economy's rapid turnaround.

But Bank of England policymakers stressed they would not be hurried. Their case has been helped by a fall in inflation to the Bank's target for the first time in more than four years.

"Members therefore saw no immediate need to raise bank rate even if the 7% unemployment threshold were to be reached in the near future," they said in minutes of their January policy meeting, released at the same time as the jobs data.

"Shifts in the composition of unemployment suggested that equilibrium unemployment might be lower than previously thought," the minutes continued.

The minutes also made clear that when an interest rate rise does eventually come, fragile prospects for growth and contained inflation means nothing will happen sharply.

Today's UK jobless rate was the lowest level since the first quarter of 2009, the Office for National Statistics said. A Reuters poll of economists had produced a median forecast of 7.3%. Many economists in the poll had expected a fall to 7.2% but none had expected 7.1%.

The ONS said the number of people claiming jobless benefits fell by 24,000 in December, compared with a forecast for a fall of 35,000 in the Reuters poll.

The number is more significant than usual because the Bank of England put unemployment at the heart of its monetary policy last August when it said it would not think about raising borrowing costs - which have been at the record low since 2009 - until the jobless rate falls to 7%.

Since then, Britain's recovery has picked up more speed than the Bank expected and unemployment has fallen fast. The International Monetary Fund yesterday sharply raised its forecasts for British economic growth this year.

To quell speculation that the Bank of England might be hurried into raising interest rates, Governor Mark Carney has repeatedly stressed that unemployment falling to 7% would not be an automatic trigger for a rate hike.

Despite its rapid recovery, the British economy remains 2% smaller than before the financial crisis.

In November, the Bank of England forecast unemployment could hit the 7% level as soon as this time next year, if interest rates stay unchanged, though its preferred scenario - which factors in the market expectations on rate rises - pointed to late 2015.

BoE policymakers, in the minutes of their January meeting, said they now expected unemployment to hit 7% "materially earlier than previously expected."

The bank is expected to use the publication of its quarterly inflation report next month to give an update on its guidance plan, possibly by lowering the threshold unemployment rate below 7% or by underscoring how the threshold is not a trigger.

Some economists have suggested the bank might set earnings growth as a way of gauging when the recovery is strong enough to withstand an increase in interest rates.