Carney Jobless Task Laid Bare as Rate Seen at 7.8%: U.K. CreditJennifer Ryan
U.K. unemployment data this week may strengthen Bank of England Governor Mark Carney’s argument that interest rates must remain at a record low for three more years to help the economy recover.
The jobless rate based on International Labour Organization standards stayed at 7.8 percent in the three months through July, according to the median estimate of 28 economists in a Bloomberg News survey. The rate has not been below 7.7 percent since 2009. The Office for National Statistics will publish the data at 9:30 a.m. in London tomorrow.
Carney says the benchmark interest rate needs to stay at a record-low 0.5 percent until the end of 2016 for enough jobs to be created to cut unemployment to 7 percent, when policy makers would consider raising rates. Investors disagree, pushing gilt yields to the highest relative to German bunds in more than three years and increasing bets on a rate increase before then.
“It will take a long time to get unemployment down,” Vicky Redwood, an economist at Capital Economics Ltd. in London and a former BOE official, said yesterday. “Markets might take a drop to 7.7 percent as a vindication of their view, but we wouldn’t rush to that same conclusion.”
Carney, who will address U.K. lawmakers on Sept. 12, introduced forward guidance last month and said the economy needs to create more than three quarters of a million jobs for unemployment to reach 7 percent.
Tomorrow’s report will highlight the long road to get there. While ILO figures on the number of people out of work have come down from a peak of almost 2.7 million in 2011, the total has held above 2.4 million since June 2009.
In addition, a further 400,000 government positions are set to be eliminated over the next three years based on Office for Budget Responsibility estimates, meaning the private sector would need to create more than 1 million jobs for the jobless rate to fall to 7 percent.
Recent business surveys suggest that companies are meeting increased demand by boosting productivity instead of taking on workers. Last month, the fastest services expansion since 2006 was accompanied by only “marginal” growth in employment, according to Markit Economics.
Some companies are hiring. Jaguar, Tata Motors Ltd.’s high-end British car brand, plans to add 1,700 jobs at its plant in Solihull, England as it invests in a new aluminum technology.
Introducing the new guidance regime on Aug. 7, Carney said that “even under conservative assumptions about the scope for a productivity rebound, the elimination of the margin of spare capacity will require a sustained period of robust growth.”
By maintaining loose policy, “the MPC can help to deliver that,” he said.
The Organization for Economic Cooperation and Development raised its forecast last week for U.K. growth in 2013 to 1.5 percent from a prediction of 0.8 percent in May.
Short sterling futures have fallen, indicating investors are increasing bets on interest rates rising before 2016. The implied yield on the contract expiring in December 2014 was at 1.01 percent, up from 0.68 percent on Aug. 1. The yield on the March 2015 contract advanced 41 basis points to 1.15 percent in that period.
The 10-year gilt yield has risen about 35 basis points in the past month and climbed above 3 percent today. Investors demanded 100 basis points of extra yield to hold U.K. debt instead of German bunds yesterday, the highest since May 2010.
“Market expectations are that the unemployment rate is going to come down a lot quicker than the BOE expects,” said Philip Rush, an economist at Nomura International Plc in London, who forecasts the first rate increase in February 2015. “I have reservations on the bank’s views on productivity.”
Carney’s message has so far focused on consumers and executives, and there are signs it’s getting through. The proportion of people expecting a rate increase in the next year fell to 29 percent last month from 34 percent in May, the BOE said in its quarterly Inflation Attitudes survey. That’s the lowest since November 2008.
The governor will get an opportunity to defend his approach when he and other members of the Monetary Policy Committee are questioned by lawmakers on Parliament’s Treasury Select Committee. Carney, Markets Director Paul Fisher, David Miles and Ian McCafferty will appear at 10 a.m. on Sept. 12.
He’s already had support from Chancellor of the Exchequer George Osborne, who said yesterday that recent market moves “vindicate” the need for guidance. “The counterfactual would have been even bigger increases in yields in response to positive economic data,” he said in a speech in London.
“Now that a sustained recovery has finally taken hold in the U.K., one of the main risks to the outlook continues to be the possibility of rising interest rates,” said Nida Ali, economic adviser to the Ernst & Young ITEM Club in London. Osborne’s support for Carney’s policies “are a step in the right direction.”