U.K. Unemployment Drops to 7.1% as BOE Threshold LoomsScott Hamilton
U.K. unemployment fell more than economists forecast to the lowest rate in almost five years, putting it within touching distance of the 7 percent threshold at which Bank of England officials say they will review borrowing costs.
Unemployment measured by International Labour Organization methods declined to 7.1 percent in the three months through November from 7.4 percent in the quarter through October, the Office for National Statistics said in London today. The median forecast of 33 economists was for a decline to 7.3 percent. In December, jobless claims fell 24,000, less than economists had forecast.
The data will add pressure on BOE Governor Mark Carney to reassess his guidance policy, under which the Monetary Policy Committee has said it will consider raising interest rates once joblessness has fallen to 7 percent. With that threshold approaching faster than officials had anticipated, economists say the central bank will refine the flagship policy when it publishes its quarterly Inflation Report on Feb. 12.
“There is the clear threat that the 7 percent threshold is breached in the next month or two,” said James Knightley, an economist at ING Bank NV in London. “The probability of an interest-rate rise in 2014 is increasing. The U.K. is likely to raise rates before both the European Central Bank and the Federal Reserve.”
BOE policy makers said they see no need to raise interest rates soon even as they forecast that unemployment will fall to their threshold “materially earlier” than anticipated. The MPC “saw no immediate need to raise bank rate even if the 7 percent unemployment threshold were to be reached in the near future,” it said in the minutes of its Jan. 8-9 meeting, published today.
The pound rose against the dollar after the reports and was trading at $1.6536 as of 10:27 a.m. London time, up 0.4 percent on the day. The 10-year gilt yield rose 5 basis points to 2.89 percent.
The unemployment drop left the ILO jobless rate at its lowest since the first quarter of 2009. No economist surveyed by Bloomberg predicted a rate of 7.1 percent. Calculated to 2 decimal places, the rate was 7.14 percent, the ONS said. The rounded 0.5 percentage-point fall from 7.7 percent in the three months through August was the biggest since 1997.
Unemployment fell by 167,000 to a 4 1/2-year low of 2.32 million people in the three months through November, today’s report showed. That’s the biggest drop since 1997 and the second largest since records began in 1971. Both youth and long-term unemployment fell.
December’s fall in jobless claims, the 14th in a row, compared with the median forecast of 28 economists in a Bloomberg News Survey for a drop of 32,000. In November, jobless claims declined 34,300 instead of the 36,700 drop initially estimated. The claimant-count rate fell to 3.7 percent in December from 3.8 percent in November.
The number of people in work climbed 280,000 to 30.2 million in the quarter through November. Both the increase and the level of employment were records, the ONS said.
With the labor market improving, almost one third of economists in a Bloomberg survey this month said the U.K. jobless rate will fall to 7 percent in the first half of the year. Sixty-eight percent said the threshold will be reached in 2014.
Of 33 economists who responded to the question on guidance, 20 said the BOE will change the policy next month, when it publishes new forecasts. Of those, nine expect the central bank to lower the unemployment threshold to 6.5 percent, with the same number forecasting a tweak to the BOE’s language to mimic that of the Federal Reserve.
The Fed made refinements to its guidance in December and pledged not to raise the main interest rate until “well past the time” joblessness falls below its threshold of 6.5 percent.
While U.K. inflation slowed to 2 percent in December, hitting the BOE’s target for the first time in more than four years, today’s ONS report showed that it continues to outpace wage growth. Total weekly pay growth in the three months through November was unchanged at 0.9 percent. Wage growth excluding bonuses quickened to 0.9 percent from 0.8 percent through October.
Separately, the ONS said the budget deficit narrowed to 12.1 billion pounds ($20 billion) last month from 14.2 billion a year earlier. Revenue rose 3 percent to a record, driven by stamp duty on property purchases and value-added tax on sales. Government spending fell 2.6 percent. The median forecast of 22 economists in a Bloomberg News survey was a 14 billion-pound deficit.
The deficit in the first nine months of the year was 96.1 billion pounds compared with 100.9 billion pounds a year earlier. Faster-than-expected growth prompted the Office for Budget Responsibility to cut its borrowing forecast for the full fiscal year to 111 billion pounds last month, or 6.8 percent of gross domestic product.
The measure that determines how much the government needs to borrow by selling gilts -- the central government net cash requirement -- was 21.9 billion pounds last month, the report showed. It took the cash deficit in the fiscal year to date to 63.4 billion pounds, down from 88.9 billion pounds a year earlier. There were no transfers of coupon cash from the Bank of England’s gilt holdings last month, the ONS said.
“Our plan is working,” Chancellor of the Exchqeuer George Osborne said on Twitter. “Lower government borrowing means greater economic security for families.”
His Liberal Democrat deputy, Chief Secretary to the Treasury Danny Alexander, said job creation and falling unemployment underlined the need to stick to the government’s deficit-cutting program. “An economy creating jobs through sustainable growth is the only way to raise living standards and help with the cost of living,” he said in a statement.