UK unemployment drops to 7.1%, is an interest rate increase to follow?

Having dropped to 7.1%, the UK’s new unemployment rate may force the Bank of England to reconsider raising interest rates.

The total number of unemployed fell by 167,000 in the three months to November to 2.32 million.

New data from the Office for National Statistics (ONS) also showed that the total number of individual claiming Jobseeker’s allowance dropped to 1.25 million in December, having previously been around the 1.5 million mark.

Even with the country’s burgeoning economy, the figures have exceeded all expectations.

The Bank has previously stated that if unemployment hits 7%, it would consider increasing interest rates from the current 0.5% figure.

Many experts believe it is now “more than likely” the unemployment rate will fall again.

The findings match recent business sentiment, with many surveys indicating firms are optimistic about increasing their hiring.

The wider picture

The jobs figures had the knock on effect of increasing the pound’s value, which hit a year-high versus the euro and a near three-week high versus the dollar of (EUR 1.2222 and USD 1.6553 respectively).

“Creating jobs and getting people into employment are central to our economic plan to build a stronger, more competitive economy,” said Employment Minister Esther McVey; “so it is very encouraging news that we’ve seen a record-breaking rise in employment over the last three months.”

After a large slump in 2010, around 1.3 million jobs were created in the UK – and nearly a quarter of a million in the last three months.

Whilst the trend started with part-time jobs in the south-east, the increase in available soon spread to the rest of the UK and included more permanent roles.

“Especially pleasing is that the fall in unemployment is coming both from declining short and long-term unemployment,” noted BNP Paribas’ David Tinsley.

In addition, there has been “a large decline in unemployment amongst 18-24 year olds.”

Over half of the analyst interviewed in a BBC sentiment poll last year stated their belief unemployment would note drop to 7% until either later in 2014 or early 2015.

Now, the significant fall in the figures mean many will be reassessing their forecasts.

The argument for a raise

The ONS stated that between September and November, weekly earnings increased by 0.9% compared to the same time last year.

This means that for now, the wage raises will not create inflationary pressure for the UK’s economy, and as such cannot be used as a reason to increase the interest rates.

Indeed, the latest minutes from the Bank of England’s Monetary Policy Committee showed the Bank of England is in no rush to increase the rates.

The notes stated that as inflation had resumed the 2% target rate in December 2013, and that cost pressures were low, it “saw no immediate need to raise the Bank rate even if the 7% unemployment threshold were to be reached in the near future.”

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