U.K. Unemployment Rate Falls to Five-Year Low

Britain’s unemployment rate dropped to a five-year low in February, underscoring the strength of the economic recovery and raising the prospect of a debate among Bank of England officials about whether to raise interest rates.

The jobless rate measured by International Labour Organization methods dropped more than economists forecast to 6.9 percent in the three months through February from 7.2 percent in the quarter through January, the Office for National Statistics said in London today. The report also showed that wage growth accelerated in the period to 1.7 percent, matching the inflation rate in February. The pound strengthened.

Today’s data voids the first phase of forward guidance, introduced by BOE Governor Mark Carney in August to suppress expectations that the central bank would rush to increase its key interest rate from a record-low. While he revamped the plan in February to focus on spare capacity, that’s created potential for divisions among policy makers, who expressed differing views on the amount of slack in the economy.

“This will change people’s expectations of when interest rates will rise because it was so far from the markets’ prediction,” said Societe Generale SA’s Brian Hilliard, the only respondent in a Bloomberg News survey of 34 economists who correctly predicted the jobless rate. “The BOE knew it was coming soon, so they were ready for it and had already diluted the importance of the unemployment rate.”

Pound Jumps

The median estimate in Bloomberg’s economist survey before the report was for the unemployment rate to drop to 7.1 percent in the three months through February. Today’s reading was the lowest since the three months ending February 2009.

The pound jumped 0.5 percent to $1.6809 at 10:22 a.m. London time and rose 0.3 percent to 82.37 pence per euro.

Jobless claims, a narrower measure of unemployment, fell 30,400 in March from the previous month, a 17th consecutive decline that was larger than forecast. In February, claims dropped 37,000, more than the 34,600 initially estimated.

The ONS also said that in the three months through February, employment surged 239,000 to a record 30.4 million people. The number of unemployed fell 77,000 to 2.24 million.

The acceleration in wage growth from 1.4 percent in the quarter through January signals that a squeeze on consumers’ living standards may be easing.

Pay Growth

The February data marks the first time inflation has not outpaced total pay growth since April 2010. Excluding bonuses, annual pay growth was 1.4 percent, up from 1.2 percent. Inflation was 1.7 percent in February and data yesterday showed it slowed to 1.6 percent in March.

The cost-of-living crisis has been a key battleground between Prime Minister David Cameron and opposition Labour Party leader Ed Miliband as they prepare for local and European Parliament elections on May 22 and a general election next year.

“These remain difficult times for families facing pressures on their budgets, and much work needs still to be done,” Chancellor of the Exchequer George Osborne said. “But today’s news supports the argument we have made all along that the only way to see rising living standards is to grow the economy.”