U.K. Unemployment Climbs Bolstering BOE Low-Rate Case

U.K. unemployment unexpectedly rose in the fourth quarter, reinforcing the case for the Bank of England to keep its key interest rate at a record low.

The jobless rate measured by International Labour Organization methods rose to 7.2 percent from 7.1 percent in the three months through November, the Office for National Statistics said in London today. No change was forecast, based on the median of 31 estimates in a Bloomberg News survey. Minutes from the BOE’s February policy meeting showed officials were united on the need to keep interest rates unchanged, as they prepared for a new phase of forward guidance.

“The pace of employment growth may be cooling a little,” said David Tinsley, an economist at BNP Paribas SA in London and a former BOE official. “Taken with the soft inflation reading yesterday, it is clear that policy makers can feel more comfortable running ultra-easy policy for a while yet.”

The BOE last week refocused its forward-guidance policy on the amount of spare capacity in the economy, in a fresh attempt to persuade borrowers that rates will stay low. Governor Mark Carney revised his flagship policy after unemployment fell toward the 7 percent threshold for considering a rate increase, two years earlier than officials projected when guidance was introduced in August.

Labor Market

Today’s report showed jobless claims fell 27,600 in January, more than economists forecast.

“The recent pace of decline in jobless claims will moderate in the coming months as suggested by the latest business surveys that showed a less dynamic pace of activity,” said Annalisa Piazza, an analyst at Newedge Strategy in London. “Despite the slight uptick in the ILO unemployment rate, the picture for the labor market remains relatively solid.”

BOE policy makers Ian McCafferty and David Miles this week said they don’t see a need to tighten policy at the moment. The case for keeping rates at 0.5 percent was boosted yesterday when official figures showed inflation fell below the BOE’s 2 percent target in January for the first time since 2009.

Minutes of the MPC’s Feb. 5-6 meeting published today said that while unemployment had fallen, there was “scope to absorb spare capacity further” before increasing borrowing costs.

“With unemployment remaining above the 7 percent threshold, the committee’s policy guidance therefore remained in place and no member thought it appropriate to tighten, or to loosen, the stance of monetary policy,” the minutes said.

The pound erased an advance against the dollar after the reports were released and was little changed at $1.66781 as of 10:58 a.m. London time. Ten-year gilt yields fell three basis points to 2.72 percent.

Youth Unemployment

Unemployment fell by 125,000 to 2.34 million people in the fourth quarter from the third as both youth and long-term joblessness declined, today’s report showed. Britain’s jobless rate compares with 6.6 percent in the U.S. and 12 percent in the euro region. The share of employed women aged 16 to 64 rose to 67.2 percent in the fourth quarter, the highest on record.

Compared with the three months through November, unemployment rose by 22,000. Monthly estimates based on a restricted sample show the jobless rate was 7.2 percent in December compared with 7.4 percent in November and 7 percent in October.

The number of people in work climbed 193,000 to 30.1 million during the fourth quarter. Full-time employment rose 209,000, while part-time work declined 16,000.

The drop in jobless claims last month, the 15th in a row, compared with the median forecast of 25 economists for a decline of 20,000. In December, jobless claims fell 27,700 instead of the 24,000 drop initially estimated. The claimant-count rate fell to 3.6 percent in January, the lowest since December 2008, from 3.7 percent in December.

Spare Capacity

Unemployment, which stood at 7.8 percent when forward guidance was introduced in August, has fallen close to the 7 percent threshold two years earlier than BOE officials initially projected. The fastest economic growth since 2007 failed to provide the spur to productivity that policy makers expected, forcing companies to meet demand by adding workers.

On Feb. 12, Carney announced that policy makers are shifting their focus to more than a dozen indicators of slack in the economy, including the demand for more working hours. In the fourth quarter, the number of part-time workers who want full-time work fell 29,000 to 1.43 million.

Total weekly pay growth in the fourth quarter accelerated to 1.1 percent from 0.9 percent in the period through November. Wage growth excluding bonuses quickened to 1 percent from 0.9 percent. Vacancies rose to 580,000 in the three months through January, the highest since 2008.

The BOE’s guidance policy is aimed at eliminating spare capacity in the economy within the next three years while keeping inflation close to the BOE’s 2 percent target. The bank will increase the benchmark rate by 25 basis points by June 2015, according to one-month forward contracts for the sterling overnight interbank average, or Sonia.

Before it's here, it's on the Bloomberg Terminal.