UK jobless drop puts spotlight on central bank

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News,Business,United Kingdom

LONDON (AP) — Britain's unemployment rate has dropped more than expected, edging closer to the point at which the Bank of England will consider raising interest rates.

The Office of National Statistics said Wednesday the unemployment rate in the three months ended Nov. 30 fell to 7.1 percent, down 0.5 percentage points from the previous period. The drop was bigger than analysts had estimated, a result of the economy's unexpectedly strong recovery.

The government was elated, declaring that the drop affirmed that its long-term economic plans were working. Advocates for the disadvantaged noted that wages failed to grow, and raised concerns about economic growth being equitably spread.

The drop in the jobless rate is being watched closely in markets because Bank of England Governor Mark Carney has said the bank will reassess its monetary policy when the unemployment rate declines to 7 percent — though he has been at pains to note this is a threshold, not a trigger.

Minutes from the bank's January monetary policy committee meeting suggest that policymakers may refrain from taking action even after crossing that threshold, with central bankers saying there was "no immediate need" to raise rates. While Britain's economic recovery is strengthening, wage and productivity growth have been weak, the bank said.

"Members therefore saw no immediate need to raise Bank Rate even if the 7 percent unemployment threshold were to be reached in the near future," the minutes said. "Moreover, it was 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."

When the time does come to increase the interest rate from its record low of 0.5 percent, "it would be appropriate to do so only gradually," according to the minutes. The voting was unanimous to keep policies unchanged in January.

Market reaction to the unemployment report was modest, with the pound rising 0.3 percent against the dollar. Tighter monetary policy tends to boost the value of a currency.

Andrew Goodwin, senior economic adviser to the EY ITEM Club, said there was no question the bank would change its guidance on interest rates.

"Today's labor market figures are the final nail in the coffin of the 7 percent threshold," he said. "The unemployment rate is set to fall below 7 percent in the next few months, more than two years earlier than the Bank had initially expected."

Goodwin predicted that the threshold will be lowered to 6.5 percent, and that policymakers should not stop there, and add a condition based on real wage growth.

"As the minutes make clear, there is no prospect of a rate rise in the near future." He said. "Raising interest rates too soon, before real wages have begun to improve and growth has broadened out, could risk choking off the fragile consumer led recovery."

Matthew Whittaker, senior economist at the Resolution Foundation, said that while the drop was good news, there was "no corresponding good news on pay with average earnings continuing to fall in real terms."

"The long wait for a pick-up in wages goes on and while some analysts think 2014 will be the year of the pay rise, there are no signs of that happening yet," he said.

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