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Unemployment rate falls close to forward guidance target

POSTED: 23rd January 2014
IN: General
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The unemployment rate in the UK has fallen sharply and is now down to 7.1 per cent, just short of the target of 7.0 per cent set by the Bank of England under its policy of forward guidance.

The unemployment rate in the UK has fallen sharply and is now down to 7.1 per cent, just short of the target of 7.0 per cent set by the Bank of England under its policy of forward guidance.

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Under the forward guidance policy announced by the Bank of England in August, it said it would consider raising interest rates when the unemployment rate fell to 7.0 per cent. However, it anticipated that would be sometime in 2016. It now looks certain it will be in the first half of 2014.

The fall in the unemployment rate announced today was bigger than expected and raises the possibility that interest rates could go up sooner.

However, the latest minutes from the Bank’s meeting of the Monetary Policy Committee (MPC) earlier this month, before today’s unemployment figures were published, indicate that even if unemployment does continue to fall, the Bank is in no rush to raise rates.

An extract from the minutes said given that inflation had returned to the two per cent target and that "cost pressures were subdued... members therefore saw no immediate need to raise the Bank rate even if the 7% unemployment threshold were to be reached in the near future".

The Office for National Statistics (ONS) reports that the number of people in work in the three months ending in November 2013 went up by 280,000 from the previous quarter ending in August and is up by 450,000 from a year earlier to 30.15 million.

In the three months ending in August 2013, the unemployment rate was 7.8 per cent before falling to 7.6 per cent in the quarter ending in September and down to 7.4 per cent last month before the further dramatic drop shown in today’s figures.

It means there are now 2.32 million people unemployed, down by 167,000 from the period June to August 2013 and down 172,000 from 12 months ago.

Dr Howard Archer, Chief UK & European Economist at IHS Global Insight said: “The marked drop in the unemployment rate opens the door to the Bank of England possibly raising interest rates – unless it amends its forward guidance policy.

“Significantly though, the Bank of England has repeatedly stresses that an unemployment rate of 7.0% is not a trigger for an interest rate hike.

“Despite the sharp drop in unemployment, we believe the odds are still strongly in favour interest rates staying at 0.50% all through 2014.”

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