Carney Seen Hitting Jobs Threshold Before BOE ForecastScott Hamilton
U.K. unemployment will hit Mark Carney’s 7 percent threshold faster than the Bank of England forecasts, prompting policy makers to assess whether they need to raise their benchmark interest rate, economists said.
Seventeen of 25 forecasters in a Bloomberg News survey see unemployment falling to the level by mid-2016, with 13 predicting it will happen in 2015 at the latest. The BOE sees it staying above the threshold until at least the fourth quarter of 2016. Data tomorrow will show the rate stayed at 7.8 percent in the second quarter, according to a separate poll.
The BOE introduced guidance last week and said it plans to keep its key rate at a record-low 0.5 percent until the jobless rate falls to 7 percent. Former U.K. policy maker Charles Goodhart said the central bank will probably need to tighten policy before the implied timeframe, and that the strength of the recovery is “probably somewhat underestimated.”
“With the U.K. economy appearing to be gaining momentum, we have doubts that bank rate will remain on hold for the next three years,” said James Knightley, an economist at ING Bank NV in London. He said the BOE is taking a “rather conservative view” and the jobless rate could reach 7 percent in 18 months.
The Office for National Statistics will publish the labor-market report at 9:30 a.m. tomorrow in London. The 30 forecasts in the unemployment survey for the three months through June range from 7.7 percent to 8 percent.
In July, jobless claims probably fell 15,000, leaving the claimant count rate at 4.4 percent, according to another survey.
Carney announced the guidance at a press conference on Aug. 7. The jobless data will coincide with the publication of the minutes of the Monetary Policy Committee’s Aug. 1 meeting, when it decided to introduce the new tool. The record will show how the nine MPC members voted on guidance, as well as the key rate and quantitative easing.
Britain’s economy is showing signs of strengthening, with indexes of manufacturing, services and construction all improving in July. Retail sales probably rose 0.7 percent in July, according to the median forecast of 21 economists before a report on Aug. 15. That would be a third straight monthly rise.
The property market is also reviving. A U.K. house-price gauge rose to the highest in almost seven years in July as government measures to stimulate the property market boosted demand, the Royal Institution of Chartered Surveyors said today.
Signs of recovery in the euro area, Britain’s biggest trading partner, may also help spur growth. The ZEW Center for European Economic Research said today that German investor confidence increased more than economists expected in August.
Factory production in the 17-nation euro region rose 0.7 percent in June from May, when it decreased a revised 0.2 percent, the European Union’s statistics office in Luxembourg said today. Its 0.3 percent increase from a year earlier was the first annual uptick in 20 months.
The BOE guidance has three conditions that will void it, including two linked to price stability. Data today showed consumer-price inflation slowed to 2.8 percent in July from 2.9 percent in June, in line with the median of 35 estimates in another survey.
“Britain is slowly but surely getting past the worst of its troubles,” said Rob Wood, an economist at Berenberg Bank in London. “Business optimism is improving and inflation is increasingly behaving itself which should help the recovery next year.”
Retail prices rose an annual 3.1 percent, meaning regulated rail fares will increase by 4.1 percent on average next year under a government cap that allows train companies to lift ticket prices by 1 percentage point more than inflation.
The statistics office also said that manufacturing input prices increased 1.1 percent in July from June and were up 5 percent from a year earlier. That’s the biggest annual increase since March 2012.
The pound erased its decline against the dollar after the inflation data were published and was trading at $1.5472 as of 10:41 a.m. London time, up 0.1 percent on the day. The yield on the benchmark 10-year U.K. government bond rose 6 basis points to 2.52 percent.
If the jobless threshold or a so-called knockout is breached, it doesn’t imply an automatic rate increase. The 7 percent level represents a point at which officials will reassess the policy stance, Carney said last week.
“Even if there is a trigger, they would probably not hike rates,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “The circumstances would need to be pretty severe to trigger a relatively early rate hike. They might amend the guidance.”
“There are so many variables now that they can just make up their own story any which way they like,” he said.