Britain’s unemployment rate has fallen to its lowest level in four-and-a-half years, data showed on Wednesday, testing the Bank of England’s plans to put off interest rate hikes for as long as possible.
The pound jumped on the data, which showed the jobless rate fast approaching the 7-per-cent level at which the U.K. central bank has said it will consider a rate hike, even as the bank warned about the risks of a stronger pound hurting Britain’s recovery.
Economists were taken aback by the fall in the unemployment rate to 7.4 per cent in the three months to October, down from 7.6 per cent a month earlier. That was a faster improvement than even the most optimistic forecasts in a Reuters poll – or, indeed, formal Bank of England expectations.
Bank Governor Mark Carney made no comment when asked about the figures at a news conference about a separate matter.
“A huge jobs gain, a chunky fall in the unemployment rate and another big fall in jobless claims signal a strong recovery is under way and raises the risk of an earlier rate hike than the [Bank of England] has indicated,” said Rob Wood at investment manager Berenberg.
The number of people with work jumped by 250,000, the biggest increase since mid-2010, with full-time jobs providing the bulk of the growth. The 99,000 fall in unemployment was the sharpest drop since 2000.
“They’re very, very strong – the underlying trend looks robust,” said Ross Walker at RBS.
Investors added to bets that the Bank of England will raise interest rates in the second quarter of 2015 and bond strategists said there was a growing chance those bets will move earlier.
But economists said signs that inflation and wage growth will stay low next year should allow the bank to keep nursing the economy back to full health with record-low interest rates.
Despite the fall in unemployment, many people with work are not seeing an improvement in living standards, a hot political issue ahead of an election due in 2015.
Average weekly earnings growth excluding bonuses grew 0.8 per cent, matching a record low and way below inflation, which stood at 2.1 per cent in November.
“We think wages, and not unemployment or [the consumer price index], will be the more likely candidate to prompt a rate-tightening cycle,” HSBC economists Simon Wells and John Zhu told clients. They forecast a first Bank of England rate hike only in late 2015.
There were other signs of Britain’s still-damaged labour market in Wednesday’s data.
Nigel Meager, director of the Institute for Employment Studies, pointed to a record-high number of people working part-time because they cannot find a full-time job. “If this figure also begins to dip in the coming months, it will be further confirmation that the recovery is a solid one,” he said.
The Bank of England said in August, shortly after Carney took over as governor, that it will not consider raising interest rates until unemployment falls to 7 per cent, assuming there is no threat to the economy from high inflation expectations.
Since then, Britain has outpaced most other industrialized economies with annualized growth of over 3 per cent. Retail sales data on Wednesday pointed to more strong growth in the fourth quarter.
Last month, the Bank of England brought forward sharply its expectations for when unemployment might hit 7 per cent to late 2014 or the third quarter of 2015, depending on different forecast models.
But even those projections are being overtaken by the data: The bank forecast that unemployment would fall to its current rate of 7.4 per cent only in the second quarter of next year.
As the recovery has picked up speed, Carney has stressed that unemployment hitting 7 per cent would not be an automatic trigger for a rate hike from record-low levels, and that the recovery needs to deepen before stimulus can be rolled back.
Carney declined to comment on the latest jobs figures when questioned about them at a news conference on the introduction plastic banknotes on Wednesday.
On Tuesday, he stressed how Britain’s economy remains at risk from weak demand from the euro zone.
On Carney’s side is an easing of inflation that slowed in November to 2.1 per cent, just a touch above the BoE’s target of 2 per cent, which it has missed each month since late 2009.
Bank of England policy makers believe the stronger pound and government measures to limit household energy bill increases mean inflation could hit its 2-per-cent target in early 2014, according to minutes of their latest meeting published on Wednesday.
But economists said Carney and his fellow bank policy makers would come under pressure to clarify what their next steps will be once unemployment hits 7 per cent, something now widely seen as likely to happen in 2014.
Philip Shaw at Investec said the bank could lower the threshold rate to 6.5 per cent – mirroring the way the U.S. Federal Reserve tweaked its forward guidance and an idea already floated by some British policy makers – or tie a rise in interest rates to wage growth as well unemployment.