Talking down expectations as 7% nears.

22nd January 2014

Ian Copelin, Investment Director, my wealth, comments “Data released today (22 January 2014) shows that UK unemployment has declined to 7.1%.  This fall was more than economists were forecasting and puts it within spitting distance of the 7% threshold at which the Governor of the Bank of England, Mark Carney, said the Monetary Policy Committee (MPC) would consider raising interest rates.  At the time Mark Carney introduced the UK to forward guidance in August last year, the BoE (and the market) wasn’t expecting 7% to be reached until 2016 (i.e. the BoE effectively stated that it did not anticipate raising rates until 2016).

Separately today, the minutes of the last Bank of England MPC meeting on 8/9 January have been released.  Whilst the BoE acknowledges that the UK economic recovery is strengthening and that the unemployment rate will reach 7% “materially earlier” than previously forecast, the MPC also states that it sees “no immediate need to raise bank rate even if the 7% unemployment threshold were to be reached in the near future”.  This shouldn’t be a surprise as Mark Carney has always stressed that 7% is not necessarily the trigger for raising interest rates, but a staging post to assess the economy (i.e. only the commitment to keep rates at current levels falls away once unemployment falls below 7%).

Given the slack (or ‘output gap’ – please see our market update ‘Goldilocks and the Three Knockouts’) in the economy, coupled with the fact that inflation remains subdued and real incomes continue to be squeezed by stagnating wages, I see no reasons at present for the BoE to increase interest rates in either this year or next.”