LONDON – Britain’s unemployment rate has dropped sharply to 7.1 per cent, edging closer to the point at which the Bank of England will consider raising interest rates.
The Office of National Statistics said Wednesday the unemployment rate in in the three months ending in November is down 0.5 percentage points in the June to August period. The rate of the drop took economists by surprise — even though many had been suggesting that the economy was improving much faster than the Bank of England had predicted.
Governor Mark Carney has said the bank will reassess its monetary policy when the unemployment rate hits 7 per cent — though he had been at pains to note it was a threshold, not a trigger.
Minutes from the bank’s January monetary policy committee meeting suggest that even after that rate is hit, policymakers may refrain from action, saying there was no “immediate need” to raise interest rates. Policymakers suggested the figures may overstate how much conditions have improved.
“Members therefore saw no immediate need to raise Bank Rate even if the 7 per cent unemployment threshold were to be reached in the near future,” the minutes said. “Moreover, it was likely that the headwinds to growth associated with the aftermath of the financial crisis would persist for some time yet and that inflationary pressures would remain contained.”
Policymakers said that when the time did come to increase the interest rate from its record low of 0.5 per cent, “it would be appropriate to do so only gradually.”
The voting was unanimous to keep policies unchanged in January.
The impact on markets was modest, with the pound rising 0.3 per cent against the dollar after the unemployment report. Tighter monetary policy tends to boost the value of a currency.
Chris Williamson, an economist for Markit.com, said the big question becomes how long the bank will feel comfortable keeping rates low.
“With so much uncertainty hanging over the Bank’s understanding of the economy, highlighted by the extent to which policymakers have been surprised by the fall in unemployment, many will see that as a somewhat bold commitment to make,” he said.