BOE’s Miles Says 7% Threshold Still Some Way OffScott Hamilton
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.
The U.K. jobless rate fell to 7.7 percent in the three months through July, moving closer to the point that the BOE has said will prompt it to reassess its policy stance. The central bank’s benchmark interest rate is at a record-low 0.5 percent.
“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 yesterday. “That may turn out to be the case, I rather doubt it myself.”
The 7 percent level is part of the forward guidance introduced last month by BOE Governor Mark Carney, who will testify to U.K. lawmakers on the plan today. Policy makers forecast that the threshold won’t be reached until late 2016, and Miles said 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 unchanged this month and left its bond-purchase program on hold.
Market yields suggest investors think the BOE will have to raise borrowing costs 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 0.96 percent, up from 0.68 percent on Aug. 1. The June 2015 yield has risen 46 basis points to 1.28 percent in that period.
Miles said it’s too early to give a full assessment of guidance and that it’s aim is to give Britons’ confidence that rates won’t rise anytime soon.
“What are we, four weeks, five weeks since the bank explained what forward guidance meant?” he said. “So to talk about the failure of forward guidance is ridiculously premature.”
Carney, along with Miles and policy makers Paul Fisher and Ian McCafferty, will give evidence in Parliament in London from 10 a.m. It’s the first time the governor will face questions from lawmakers on guidance and the jobless threshold since the policy was introduced.
“We expect them to emphasize the importance that households and businesses take on board the message that interest rates are likely to remain low for a long time, and to observe that early indications are that this message has got through,” said Simon Hayes, an economist at Barclays Plc in London. “From that perspective they would deem forward guidance to have been worthwhile.”
The unemployment rate in May-July is the lowest since the September-November 2012 period. It was last at 7 percent or lower in the quarter through February 2009. The labor-market statistics published yesterday 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.