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UK unemployment rate prompts rate rise talk

Wednesday - 12/18/2013, 9:18am  ET

DANICA KIRKA
Associated Press

LONDON (AP) -- Britain's unemployment rate has fallen to its lowest rate in about four years, official figures showed Wednesday, in a development that's reinforced expectations that the Bank of England will start raising interest rates sooner than previously thought.

The Office for National Statistics said the unemployment rate fell to 7.4 percent for the three months ending in October, down 0.3 percentage points from the previous three-month period.

The decline provides further evidence that the recovery of Europe's third-largest economy is gathering pace and comes just a day after Bank Governor Mark Carney said the British economy was performing better than predicted. The fall takes the rate nearer to the 7 percent threshold the central bank has said will prompt an assessment of policy.

Carney has insisted that the Bank will not act prematurely -- or automatically -- when the threshold is reached. However, the recent falls in unemployment have prompted economists to predict that the bank will raise interest rates sooner, perhaps as soon as next year.

That was evident in the performance of the pound, which was trading 0.5 percent higher at $1.6353.

The bank has kept its main interest rate at the record low of 0.5 percent since early 2009 in the wake of a financial crisis that caused the country's deepest recession since World War II.

Katie Evans, an economist at the Centre for Economic and Business Research, thinks the unemployment rate will continue to fall to 7.1 percent by the end of 2014, "setting the scene for the Bank of England to increase interest rates in early 2015." The bank's latest forecasts suggest the target may be reached by the third quarter of 2015 rather than the original estimate of 2016.

The minutes of the Bank's last policy meeting showed no sign of any imminent rise. The nine rate-setters on the Monetary Policy Committee voted unanimously to keep interest rates unchanged and to refrain from pumping more money into the economy.

Members of Britain's Conservative-led government said the unemployment figures provided further evidence that its economic strategy is working.

Deputy Prime Minister Nick Clegg, who is the leader of the smaller coalition partner, the Liberal Democrats, said the figures provide a "clear message that we have built the foundations for healthy UK growth and a stronger economy."

However, a closer analysis of the data underscored concerns that much of the country is still failing to see better times and an improvement in living standards. Wages, more often than not, are being outstripped by price rises, particularly with regard to energy costs.

Matthew Whittaker, the senior economist at the Resolution Foundation, said that while the drop in inflation -- now measuring at 2.1 percent -- will help, it's not enough.

"Wage growth itself still remains historically weak," he said. "Until that picks up, analysts are right to worry about the sustainability of the recovery -- with pressure on household incomes from other sources, consumer spending rests heavily on a return to solid wage growth."


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