Bank of England in no rush to raise interest rates despite fall in unemployment (From The Northern Echo)
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Bank of England in no rush to raise interest rates despite fall in unemployment
11:35am Wednesday 22nd January 2014 in News
BANK of England policymakers are in no hurry to raise interest rates even if unemployment falls back to its 7% threshold soon.
Minutes of the Bank's meeting earlier this month revealed members of the nine-strong monetary policy committee (MPC) "see no immediate need to raise rates" regardless of plunging unemployment, which is now just a whisker away from the target set under its forward guidance policy.
A shock fall in unemployment to 7.1% in November, down from 7.4% in October, means the threshold is now likely to be hit more than two years earlier than the Bank originally predicted.
It pledged last year not to consider raising rates above 0.5% until unemployment falls to 7%, at the time predicting this would not be reached until 2016.
But it admitted in this month's rates meeting that the rate could be reached "materially earlier than previously expected" as Britain's recovery gathers pace.
It said the fall in unemployment suggested there was less slack in the economy than thought, which could see growth beat its forecasts for just under 1% in the fourth quarter of 2013 and the first quarter of 2014.
But minutes revealed it was potentially misleading to focus solely on the headline unemployment rate.
"The relative success of the long-term unemployed in finding jobs suggested that labour market slack might not have been eroded as much as the fall in the headline unemployment rate appeared to imply," the Bank said.
The sharp fall in unemployment fuels speculation that the Bank may need to tweak its forward guidance policy, with experts predicting it could change the threshold to 6.5% or even lower at next month's inflation report.
Rate-setters have been keen to stress that the cost of borrowing will be kept on hold to support the recovery, given that growth is still far below its pre-financial crisis levels despite the recent pick-up in activity.
Minutes of the January meeting confirmed the MPC was unanimous in holding rates at 0.5% and the quantitative easing policy at £375 billion as it highlighted "a number of headwinds" that still face the economy.
It said ongoing economic recovery would require a "pick-up in real income growth, underpinned by a more sustained expansion in corporate spending and an improvement in productivity performance".
The unemployment figures revealed that average wage growth has remained at 0.9% - far below the UK's 2% level of inflation - and experts at the Ernst & Young Item Club urged the Bank earlier this week to consider using pay growth as an additional threshold for its rates policy.
The Bank cautioned there could be further pressure on wage growth in its meeting earlier this month and said it was likely "the headwinds to growth associated with the aftermath of the financial crisis would persist for some time yet".
"Members therefore saw no immediate need to raise Bank rate even if the 7% unemployment threshold were to be reached in the near future," it said.
"Consequently when the time did come to raise Bank Rate, it would be appropriate to do so only gradually."
Capital Economics expert Samuel Tombs said the minutes provided more evidence that the Bank will stick by its rates pledge, despite falling unemployment.
"We think that there is a strong chance the committee will alter its forward guidance alongside next month's Inflation Report in order to provide the recovery with more support," he said.
But Chris Williamson, chief economist at Markit, raised questions over the Bank's pledge to keep rates on hold regardless of its threshold being met.
"With so much uncertainty hanging over the Bank's understanding of the economy, highlighted by the extent to which policymakers have been surprised by the fall in unemployment, many will see that as a somewhat bold commitment to make," he said.
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