Bank of England policy maker David Miles said he’s skeptical that the recent strength of the recovery will translate into a sharp drop in unemployment toward the level that may trigger a rate increase.
Data today showed the U.K. jobless rate fell to 7.7 percent in the three months through July, moving closer to the 7 percent that the BOE has said will prompt it to reassess its policy stance. The report followed surveys indicating the economy continued to gather pace this quarter.
“People may interpret that good news as implying that we might reach the 7 percent threshold relatively quickly,” Miles said at an event in London today. “That may turn out to be the case, I rather doubt it myself.”
The 7 percent level is part of the forward guidance introduced by BOE Governor Mark Carney last month, a policy aimed at cementing the recovery. Policy makers forecast that the threshold won’t be reached until late 2016, and Miles said today that productivity will improve along with the overall economy, limiting the pace of hiring.
“Once growth and demand pick up more strongly for a sustained period, productivity will itself move up rather sharply,” he said. “That would mean unemployment might move down less than would normally be the case given the strength in demand and economic activity.”
Miles also said that policy “can become more expansionary if it’s judged that’s what is needed.” The BOE kept its benchmark rate at a record low of 0.5 percent this month and left its bond-purchase program on hold.
The 7.7 percent unemployment rate is the lowest since the September-November 2012 period. Unemployment was last at 7 percent or lower in the quarter through February 2009.
The labor-market statistics also showed that jobless claims fell 32,600 in August, more than economists had forecast. The total decline in claims in July and August was the biggest two-month drop since 1997.
Market yields suggest investors think the BOE will have to raise interest rates before the 2016 horizon indicated. Short-sterling futures have dropped, indicating investors are adding to bets on higher rates. The implied yield on the contract expiring in December 2014 is 0.98 percent, up from 0.68 percent on Aug. 1.
Carney, along with Miles and policy makers Paul Fisher and Ian McCafferty, will give evidence in Parliament tomorrow. It’s the first time the governor will face questions from lawmakers on guidance since it was introduced.
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