Closely watched indicator takes tentative step towards 7% that could trigger rise in interest rates from Bank of England
Britain’s unemployment rate has fallen to 7.7%, in the first tentative step towards the 7% target Bank of England governor Mark Carney says may signal an economy strong enough to withstand a rise in interest rates.
The jobless rate has become a closely watched indicator in the City since the Bank’s monetary policy committee introduced its policy of forward guidance, promising to leave borrowing costs on hold at their record low of 0.5% at least until unemployment falls to 7%.
Unemployment on the broad International Labour Organisation measure tracked by the Bank stood at 2.49 million from May to July, down by 24,000 from three months earlier, according to the Office for National Statistics (ONS).
That took the unemployment rate to 7.7%, from 7.8% over the previous three-month period, driven by a larger-than-expected 80,000 increase in employment.
On the more timely claimant count measure, which just includes people receiving out-of-work benefits, unemployment also fell, by 32,600 in August to 1.4m.
Sterling surged to a seven-month high against both the euro and the dollar after the news, as investors continued to bet on a stronger recovery than the MPC expects. “Markets are clearly ignoring Carney’s ‘low rates for longer’ pledge and driving sterling higher in currency markets,” said Nawaz Ali, market analyst at Western Union.
Carney used his first set-piece speech as governor to set out the reasons why he doesn’t expect unemployment to fall sharply over the next two years; and stress that the 7% threshold was a “staging post”, which need not trigger an automatic rate rise.
Chris Williamson, chief economist at data provider Markit, said: “The upturn in the labour market bodes well for the sustainability of the wider recovery, as more people in employment and rising wages should help boost economic growth further. The improvement also increases the possibility that unemployment could fall faster than the Bank of England expects, meaning an earlier hike in interest rates than 2016, as currently envisaged under the Bank’s ‘forward guidance’.”
There were 334,000 new jobs created in the economy between June and a year earlier, the ONS said – the latest period for which figures are available – with the largest increase, of 117,000, coming in health and social work, within the private sector. With the housing market starting to show signs of life, there was a 77,000 rise in the number of people employed in “real estate activities”.
Despite the improving picture, there was also evidence in the detail of the figures that conditions in the labour market remain tough for many.
Average pay rose at an annual rate of just 1%, or 1.1% including bonuses – well below the 2.8% rate of inflation – suggesting that living standards are still being squeezed.
The ONS also highlighted the fact that much of the increase in employment – almost all of it, for women – has been in part-time work, in many cases taken up by employees who would prefer a full-time job if they could find one.
Almost a third of men, and 13.5% of women, in part-time work or self-employment would prefer to be in a full-time role, according to the ONS.
Long-term unemployment has also remained stubbornly high: while overall unemployment has fallen by 105,000 over the past 12 months, the number of people unemployed for more than a year is little changed, at just below 900,000.
Young people are also failing to feel the benefit of the upturn, with youth unemployment 9,000 higher in May to July than three months earlier, at 960,000.
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