THE Bank of England is “ramming home” the message that interest rates are unlikely to rise soon, despite the recent drop in the unemployment rate, according to a leading economist.
The UK unemployment rate fell to 7.1 per cent in the three months to November, a fraction above the seven per cent level which the bank has said is its threshold for thinking about raising interest rates from their current all-time low of 0.5 per cent. Some investors are betting that interest rates will rise sooner than previously expected.
Citi’s chief UK economist Michael Saunders said: “We expect the MPC (Monetary Policy Committee) will lift the policy rate to two per cent... by late 2015, still leaving policy supportive of growth.”
The rate of 7.1 per cent was below economists’ forecast and the lowest in nearly five years. It was down from a previous level of 7.4 per cent, the Office for National Statistics said. The number of people in work grew by a record amount, a further sign of the economy’s rapid turnaround.
Bank policymakers stressed, however, they would not be hurried into raising rates. Their case has been helped by a fall in inflation to the Bank’s target for the first time in more than four years.
“Members therefore saw no immediate need to raise Bank Rate even if the seven per cent unemployment threshold were to be reached in the near future,” they said in minutes of their January policy meeting, released at the same time as the jobs data.
The minutes also made clear that when an interest rate rise does eventually come, fragile prospects for growth and low inflation means moves will be gradual. The Bank is expected to use the publication of its Quarterly Inflation Report next month to give an update on its guidance, possibly by lowering the threshold unemployment rate below seven per cent or by underscoring how the threshold is not a trigger.
Howard Archer, the chief UK and European Economist at IHS Global Insight, said that the Bank of England was “looking to take every opportunity to ram home the message that interest rates are unlikely to rise any time soon even if unemployment rate hits 7.0 per cent imminently. MPC members are also stressing that when interest rates do eventually start to rise, they will do so only gradually. Building on the comments made in the January MPC minutes, committee members Paul Fisher and Ian McCafferty have both emphasised in speeches that the MPC sees no immediate need to raise interest rates once the unemployment rate gets down to 7.0 per cent.
“The Bank of England continues to place great emphasis on the fact that the recovery is coming from a low base and that significant headwinds could still derail it. It is evident that the Bank of England wants to give the economy every chance to develop sustained broad-based growth with business investment increasingly contributing. It would also like to see the external sector contribute more, and it will be very aware that an early raising of interest rates could send already strong sterling higher thereby damaging export prospects.”
Tim Wheldon, corporate partner at law firm Addleshaw Goddard and head of the firm’s Leeds office, said: “Any rise in rates will have to be managed sensibly, so as to not affect the rate of economic recovery on business.
“Growth is very much on the agenda and all must be done to continue this positive momentum.”
Christian Hunt, a York-based partner at Langleys Solicitors, who acts for many Yorkshire companies, said: “While there is likely to be concerted pressure from the City and pensions savers for an increase in interests rates to boost returns, the MPC should take a prudent approach and not risk the continued recovery which remains fragile.”