Interest Rate Rise still Unlikely even though Unemployment Reduces

The Bank of England is unlikely to raise the Base rate in the short term despite unemployment falling to within a whisker of the trigger point for a hike in rates. That’s the view of the Monetary Policy Committee after new data revealed that the UK’s unemployment rate is falling faster than expected and is expected to reach 7 per cent – the threshold for the Bank to consider raising rates – in the next few months.

The new Governor of the Bank of England, Mark Carney, has defended his ‘forward guidance’ policy despite a key element of that guidance being breached much earlier than expected.

Unemployment falls much faster than expected

When he was appointed bank governor, Mr Carney said an interest rate rise would not be considered until the unemployment rate fell to 7 per cent of the workforce. The bank did not expect this to happen until 2016 at the earliest.

However, with the economy growing steadily, he said that even if the unemployment rate hit this threshold earlier, the Bank would not automatically raise rates.

Now, new data has revealed that unemployment fell by 167,000 in the three months to November 2013 – a much larger fall than anticipated. The unemployment rate is now 7.1 per cent, just above the threshold at which the Bank said it would consider an increase in the Base rate.

Prime Minister David Cameron said on Twitter: “The biggest quarterly increase in employment on record. More jobs means more security, peace of mind and opportunity for the British people.”

Minutes of the bank’s January policy meeting show that officials now expect unemployment to hit 7 per cent ‘materially earlier than previously expected’.

But, with inflation also falling faster than expected – hitting its 2 per cent target for the first time in more than four years in December – the Monetary Policy Committee do not see the need for an interest rate rise.

The minutes say: “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.”

Carney defends ‘forward guidance’ policy

Mr Carney has also defended the ‘forward guidance’ policy he introduced in the summer, even in light of the unemployment figures and the fact that the unemployment threshold may be reached two years earlier than expected.

He said the Bank’s forward guidance had given confidence to households and businesses that interest rates would remain low and stable, and that this had contributed to the current strength of the UK’s economic recovery.

Islay Robinson, CEO of London mortgage advisor and high value mortgage experts Enness Private Clients, said: “It is clear that unemployment is falling faster than expected but I don’t think this will force the Bank of England into an interest rate rise straight away.

“With inflation falling it seems apparent that the unemployment level consistent with low inflation is lower than the Bank originally anticipated, meaning large mortgage customers can expect their interest rate to remain low for a little while longer.”