Carney Seen Yielding on Rates as Joblessness Falls: U.K. CreditScott Hamilton
Bank of England Governor Mark Carney is set to signal that interest rates could rise sooner than previously anticipated as unemployment edges closer to the key threshold.
The jobless rate fell to 7.6 percent in the third quarter, the lowest since 2009, from 7.7 percent, according to the median of 30 estimates in a Bloomberg News survey. The Office for National Statistics is due to release the data at 9:30 a.m. on Nov. 13. An hour later, Carney publishes new economic and inflation forecasts at a quarterly press conference in London.
Since the last projections in August, when the BOE said unemployment is unlikely to hit the 7 percent jobless threshold for considering interest-rate increases until late 2016, the recovery has strengthened and the economy added more jobs than expected. That’s driven market yields higher as investors bet officials will start tightening policy as early as 2015.
“It looks like we’ll see another fall in unemployment,” said Samuel Tombs, an economist at Capital Economics Ltd. in London. “This may bolster markets’ view that interest rates will rise in a couple of years time.”
Short-sterling futures contracts declined in the past week after stronger-than-forecast services, construction and industrial production data, a sign that traders are adding to bets for higher borrowing costs. The implied yield on the contract expiring in September 2015 is at 1.28 percent, up from 1.12 percent on Nov. 1.
The benchmark 10-year gilt yield has risen since Carney took over on July 1, taking the spread over equivalent German debt to 1.04 percentage points, the highest since October 2005.
The Monetary Policy Committee held its benchmark rate at a record-low 0.5 percent on Nov. 7 and kept its bond-purchase program at 375 billion pounds ($601 billion). The nine-member panel made the decisions with the new economic projections.
Fifteen of 16 economists in a Bloomberg survey say the MPC will raise its economic growth forecasts for this year when it publishes its Inflation Report. All 16 predict an upward revision for 2014.
An upgrade would follow similar revisions in the past 10 days from the European Commission, the Confederation of British Industry and the National Institute of Economic and Social Research.
According to Markit Economics, services firms added payrolls at the fastest pace since 1997 last month. Together, its purchasing-manager surveys of services, manufacturing and construction indicate private industry is adding more than 100,000 jobs a quarter, about four times the number being axed in the public sector.
The brighter outlook for the U.K. contrasts with the euro area, which had its forecast cut by the commission on Nov. 5. The European Central Bank reduced its key interest rate two days later, citing the risk of a prolonged period of low inflation. Figures this week are forecast to show growth in the 17-nation euro region slowing to a crawl.
While Britain’s recovery is strengthening, risks remain and Carney may avoid overselling the economy’s strength. Inflation is outpacing wage growth, which may limit consumer spending. Official figures last week showed net trade acted as a drag on growth in third quarter, and sterling’s appreciation may further dampen the prospects of pickup in exports.
The pound gained 3.9 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. It rose 3.4 percent against the dollar and 2.9 percent against the euro, the currency of Britain’s largest trading partner.
“The BOE will presumably want to guard against any overly hawkish market reaction, so we would expect these revised forecasts to be accompanied by some dovish, cautious rhetoric,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London.
Walker forecasts that unemployment will reach the 7 percent threshold in the first quarter of 2015. He expects the BOE to bring forward its projection to the first quarter of 2016. The rate has fallen from 7.8 percent since the last BOE forecasts.
The central bank has argued it will take time for unemployment to reach 7 percent because companies will boost the productivity of existing workers before they hire new ones, and because a growing workforce means demand for jobs will stay high. It estimated the creation of at least 750,000 jobs in total will be required.
This week’s labor report will also include data on claims for jobless benefit in October, a narrower measure of unemployment They are forecast to show a drop of 30,000, a 12th straight monthly decline, a Bloomberg survey shows.