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British jobless rate unlikely to rise much in 2017 - Bank of England's Saunders
January 13, 2017 / 9:34 AM / in 6 months

British jobless rate unlikely to rise much in 2017 - Bank of England's Saunders

A construction worker works on a site in London February 19, 2014.Neil Hall

LONDON (Reuters) - British unemployment is unlikely to rise this year by as much as the Bank of England forecast two months ago, and should instead stay close to its current 11-year low, one of the bank's policymakers said on Friday.

Michael Saunders said inflation was still likely to overshoot the BoE's 2 percent target this year, but this reflected sterling's weakness since June's Brexit vote.

"Economic growth has recently been stronger than expected," he said in a speech to London's Resolution Foundation, a think tank focused on low pay.

"Rather than the rise in unemployment forecast in the November Inflation Report, it seems quite possible to me that the jobless rate will stay below 5 percent this year," he added.

Britain's unemployment rate fell to 4.8 percent in the third quarter of 2016, the lowest since 2005. In November the BoE forecast it would rise to 5.4 percent by the end of 2017, as annual economic growth slowed to 1.4 percent from about 2 percent in 2016.

The central bank cut interest rates to a record low of 0.25 percent in August due to fears that Britain's economy would slow sharply after June's vote to leave the European Union. But as signs grew that the economy was holding up, the BoE said in November it no longer intended to cut rates further.

Saunders, an independent external member of the BoE's Monetary Policy Committee, said the equilibrium jobless rate - the rate where it exerts no upward pressure on inflation - had probably fallen below 5 percent, but he was unsure by how much.

Rather than pushing up unemployment, he said economic weakness was more likely than in the past to translate into less secure jobs, shorter hours, or people leaving the workforce.

Strong wage growth was not in prospect, however. Saunders predicted it would remain well below the 4 percent rates seen before the financial crisis, unless growth or public inflation expectations moved much higher than he expected.

One factor in this, he said, might be the role of migration from the European Union in pushing down wages at the lower end of the labour market - something which other economists have struggled to find much hard evidence of in Britain.

But Saunders said some of this analysis might have been too simplistic and failed to factor in how much pay would normally increase as the jobless rate fell and growth picked up.

"The greatest undershoots in pay growth relative to the jobless rate in recent years have been in regions with high migration inflows," he said, referring to London and southeast and eastern England.

However, Saunders said economists had been misled in the past by overestimating the amount of slack in the economy, only to be surprised by a later surge in inflation.

"If pay and other labour market guides give clear warning signs in coming months ... this would have obvious implications for monetary policy, unless downside risks to economic growth rise significantly," he said.

Additional reporting by Alistair Smout, editing by William Schomberg

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