When Mark Carney revealed his plans last August to keep interest rates at 0.5 per cent, until the UK unemployment rate dropped to 7%, he would not have expected to make a decision on the matter for at least another 12 months. As it stands, the figure has been met within 6 months since Carney’s outline for his forward guidance plans, raising questions on whether the Bank of England will seriously consider raising rates.
During the three month period from August to November 2013, the level of those out of work fell by 167,000 to a figure of 2.32 million, as revealed by the Office of National Statistics. The ONS also showed that the level of people reliant on claims for Jobseeker’s Allowance dropped by 24,000, to 1.25 million by the end of the year. What this has shown is that the BOE predictions for growth were perhaps a little cautious, and in fact the improvement in employment has surprised the majority of economists.
Since the reveal of the figures to the public yesterday, Mark Carney has moved to quash any potential suggestions that a decision on rates will be instant. The minutes from the monetary policy committee meeting were published yesterday, and these showed that the BOE agreed that just because the target for unemployment may be met sooner rather than later, this was not the trigger for interest rate movement.
Of note from the minutes, the following shows that the BOE will give the decision some thought before reacting: “It is likely that the headwinds to growth associated with the aftermath of the financial crisis would persist for some time yet and that inflationary pressures would remain contained. Consequently when the time did come to raise Bank Rate, it would be appropriate to do so only gradually.”
Of most concern for the Government and the BOE will be that the rate of inflation and the level of the average UK income are not as positive as the unemployment figures. The level of total pay and regular income increased by 0.9 per cent, still flagging behind the annual rate of inflation, which levelled at 2 per cent in December 2013. The issue became the talk of the day during the Prime Minister’s Questions in the House of Commons, and Ed Miliband, the leader of the Labour party, noted that the current average wage within the UK is £1600 lower than stated during the general election in 2010.
Miliband did however say that: "We welcome the fall in unemployment because whenever an individual gets back into work, it's good for them and good for their family." David Cameron countered by stating that: "youth unemployment coming down, long-term unemployment coming down, the claimant count coming down". He also noted that this was, "the biggest ever quarterly increase in the number of people in work in our country."
When the chancellor, George Osborne, was probed on the issue of rate rises yesterday, he stated that this was a decision for the Bank of England, but he felt that the drop in unemployment showed that his monetary policies were having a positive effect on the economy. As the Bank of England now seem to be hesitant to raise interest rates immediately, it may be the case that they continue to monitor the effect that inflation has on the average UK income, before making any initial increase to interest rates.
Article By: Simon Butler, Senior Mortgage Conusltant at Contractor Mortgages Made Easy
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