LONDON (Reuters) - British unemployment is falling faster than previously thought and will reach the Bank of England’s 7 percent threshold for considering a rate hike well before the central bank envisages, a Reuters poll found.
The poll of 50 economists, taken this week, suggests it will fall steadily in the coming quarters and reach 7 percent early next year. A December poll had pointed to this happening in the second quarter of 2015 and a November poll even later.
“Recent sharp falls in unemployment will probably continue over the next few months. It will still take a year or so to reach 7 percent but growth in the workforce should remain strong,” said Samuel Tombs at Capital Economics.
The BoE has pledged not to discuss hiking interest rates from their record low of 0.5 percent until the goal is met.
Britain’s economic recovery picked up pace last year and some economists say the Bank will lower its target and hold borrowing costs low until the country’s turnaround broadens out.
The bank’s actions will also be closely watched by the country’s politicians, who are beginning to gear up for an election in May 2015 which could hinge on the economy.
Thirteen of 35 economists in the poll expect a lowering of the threshold, probably to 6.5 percent, a similar proportion to that in a Reuters poll taken earlier this month ahead of the Bank’s January policy meeting when it left policy unchanged.
“The BoE needs to review whether the 7 percent unemployment threshold is appropriate for the use of forward guidance, especially as the unemployment rate is quickly approaching 7 percent,” said Azad Zangana at Schroders.
“Hitting the threshold will give the impression that the BoE will then consider raising interest rates, which we think it has no intention of doing in the near term.”
Some pressure on the Bank has eased - data on Tuesday showed inflation had fallen to its 2.0 percent target for the first time in four years during December, but may nudge up again as utility and transport price rises are factored in.
With growth picking up and unemployment falling, economists are now narrowly predicting a rate hike in the second quarter of 2015, albeit one of only 25 basis points. The is the first time in nearly two years that the Reuters poll has signalled a tightening of monetary policy.
Britain’s economy is still 2 percent smaller than before the financial crisis began but its growth rate is far outstripping the neighbouring euro zone, its main trading partner.
The economy is expected to grow 0.6 percent per quarter through to the middle of next year, the end of the forecast horizon and the highest forecasts to date, compared to just 0.2-0.4 percent in the common currency bloc.
Recovery in the now 18-member union remains fragile, with unemployment running at a record high and an increasing threat of deflation.
“There are still significant risks from any renewed flare-up in the euro zone crisis,” said John Hawksworth, chief UK economist at PwC.
Polling by Swati Chaturvedi and Hari Kishan; Editing by Toby Chopra