UK unemployment coming down faster than expected- Bank of England

LONDON Wed Oct 23, 2013 11:12am BST

The Bank of England is seen in the City of London August 7, 2013. REUTERS/Toby Melville

The Bank of England is seen in the City of London August 7, 2013.

Credit: Reuters/Toby Melville

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LONDON (Reuters) - British unemployment appears to be falling slightly faster than forecast against a backdrop of a robust recovery which is proving stronger than expected, Bank of England policymakers concluded at their October rate-setting meeting.

The BoE committed in August to keep interest rates on hold until unemployment hits 7 percent - something it forecast would take three years - unless inflation threatens to get out of control or there are major risks to financial stability.

But since then growth has been strong and the unemployment has dropped to 7.7 percent from 7.8 percent, prompting analysts to predict the BoE would amend its forecasts and eventually raise rates earlier.

"The fall in unemployment in the three months to July appeared to reflect growth in full-time permanent jobs," minutes of the Monetary Policy Committee's October 8-9 discussion showed.

"It now therefore seemed probable that unemployment would be lower, and output growth faster, in the second half of 2013 than expected at the time of the August Inflation Report."

Even at the time of the August forecasts, most private-sector economists were already expecting unemployment to fall much faster than the BoE predicted, and for interest rates to rise sooner than the late 2016 date implied by the central bank.

Peter Dixon, an economist at Commerzbank, said the bank's recognition that slack in the economy was being run down more quickly than it thought in August suggested the BoE might bring forward its estimate for when unemployment falls to 7 percent.

"Whether it will be in November is perhaps premature to say, but over the course of the next few months I will certainly be looking for indications that they might need to bring it forward."

Capital Economics, a consultancy, said a change as soon as November was probable but the Bank's interest rates still looked set to stay at its record low for several more years given the scope for productivity improvements.

UNANIMOUS VOTE

The MPC voted unanimously to keep interest rates on hold, with no signs that any of the 'knock-out' clauses that can void the forward guidance policy were close to being breached, and saw little case for more stimulus.

However, policymakers remained divided about how rapidly productivity would pick up, and by extension, how fast unemployment will fall as the economy recovers.

"It was too soon to draw a firm conclusion from recent labour market outturns about the extent to which productivity would increase," the minutes said, adding that officials would look closely at wage settlements early next year.

Bank of England staff now forecast that the economy would grow by 0.7 percent a quarter or slightly faster in the second half of 2013, a stronger growth rate than assumed in August but less than that indicated by some private-sector surveys.

The U.S. government shutdown was assumed to have limited lasting impact, but overall prospects for overseas demand were mixed.

As a result, policymakers are concerned that Britain's growth would be less balanced than it would like, and insufficiently weighted towards exports and longer-term investment.

Speaking elsewhere on Wednesday, Britain's deputy chancellor Danny Alexander urged businesses to invest more of their 500 billion pounds ($810.6 billion) in cash deposits to help boost the recovery.

"The engine has had a full service and is getting going again. But it won't get into top gear until British business starts investing some of the half-trillion pounds' worth of cash it's built up in reserve," Alexander said.

The MPC noted a recent rise in sterling could have mixed effects on the economy. While a stronger currency bears down on inflation and increases disposable income, over the medium term it may raise demand for imports and hurt exports.

The MPC also said that a recent rise in house prices that has seen national prices rise by around 6 percent on the year was likely to continue. Figures from the British Bankers' Association on Wednesday showed a 40 percent annual rise in mortgage approvals.

This could boost growth by increasing collateral available to households and small businesses, making it easier for them to borrow.

The BoE's long-term goal remains to return consumer price inflation to 2 percent, without causing unnecessary volatility in growth. Inflation has exceeded 2 percent since December 2009, and currently stands at 2.7 percent.

(Editing by Patrick Graham)

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