22 Jan 2014

As unemployment falls, will interest rates rise?

Unemployment falls by 167,000 to reach a five-year low of 2.32 million. The jobless rate is now 7.1 per cent, just above the level that could trigger an interest rate rise.

The drop, from September to November, was bigger than many economists had expected. In a Reuters poll, none had predicted a fall to 7.1 per cent. It is the second biggest fall in unemployment on record, with joblessness now at its lowest for five years.

The number of people claiming jobseeker’s allowance in December also dropped by 24,000 to 1.25 million, according to the Office for National Statistics.

The number of people in work has reached a record high of just over 30 million, giving an employment rate of 72.1 per cent.

There was also good news on average earnings, with salaries rising by 0.9 per cent in the year to November.

‘More jobs means more security’

Prime Minister David Cameron said on Twitter: “The biggest quarterly increase in employment on record. More jobs means more security, peace of mind and opportunity for the British people.”

Rachel Reeves, shadow work and pensions secretary, said: “Today’s fall in overall unemployment is welcome. The government should use this opportunity to tackle the unacceptably high levels of long-term unemployment and youth unemployment. More than 900,000 young people are unemployed and over 250,000 young people are long-term unemployed.”

With growth exceeding previous estimates and unemployment falling faster than expected, there is more likelihood of a rise in the Bank of England’s base rate, which has been kept at 0.5 per cent since 2009.

When he was appointed bank governor, Mark Carney (pictured above) said a rise would not be considered until unemployment dropped to 7 per cent of the workforce, which the bank did not not expect to happen for at least three years.

With the economy growing steadily, he said in November there would not be an automatic rise when this happened.

‘Materially earlier than expected’

Minutes of the bank’s January policy meeting, released on Wednesday, show that officials now expect unemployment to hit 7 per cent “materially earlier than previously expected”.

But with inflation also falling faster than expected – hitting its 2 per cent target for the first time in more than four years in December – they do not see the need for an interest rate rise.

The minutes say: “Members therefore saw no immediate need to raise bank rate even if the 7 per cent unemployment threshold were to be reached in the near future.”

On Tuesday, the International Monetary Fund raised its forecast for 2014 growth to 2.4 per cent from 1.9 per cent, the biggest upward revision for any advanced economy. The Bank of Enfgland forecast growth of 2.8 per cent in November.