Unemployment Falls to 7.4%

Unemployment has fallen to its lowest level since 2009. With 7.4% of the UK population is now out of work, bringing investors one step closer to an interest rate hike 

Emma Wall 18 December, 2013 | 2:48PM
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A surge in employment has brought the jobless level down to just 7.4% - meaning the UK is one step closer to an interest rate rise. This is the second consecutive decline in the unemployment rate and the lowest rate since April 2009. UK employment in the three months to October is up 250,000, compared to the previous three months, outpacing consensus expectations of 165,000.

Last month Bank of Enlgand governor Mark Carney explained that stronger than expected demand has helped the unemployment rate to fall faster than expected. The Bank forecast that unemployment rate to hit the Bank’s 7% threshold in the second half of 2015. Bank of England base rate has stubbornly remained at 0.5% for nearly five years, since March 2009. But once the unemployment threshold is met the Bank of England will negotiate an interest rate rise. 

“Latest data from the Office of National Statistics shows a huge surge in employment and sharp fall in the unemployment rate. This news comes as a shock as GDP output has continued to lag the recovery in the labour market," said Azad Zangana, European economist at Schroders. 

"The boost in employment should continue to drive the economy into 2014. The only thing missing from the Chancellor’s wish list is a rise in real wages. The fall in the unemployment rate will also put the Bank of England under pressure, as it has promised to consider raising interest rates when the unemployment rate falls to its 7% threshold. This is clearly coming sooner than expected, and is now being reflected by markets."

Union spokesperson TUC general secretary Frances O’Grady warned that the UK was still far off pre-recession employment levels, and said that the recovery was patchy – with more than 15,000 long-term dole claimants in Birmingham alone.

Chris Towner, director of FX advisory services at foreign currency specialists HiFX said that the broad based recovery in the UK which has seen the economy grow by 0.8% in the third quarter was now translating into an improvement in the jobs market.

“We are seeing the 7% target level for the Bank of England to review adjusting rates appear on the horizon far sooner than had been expected. At the same time though we had the minutes from the previous Bank of England meeting which said that further sterling strength could hurt the recovery,” he warned.

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Emma Wall  is former Senior International Editor for Morningstar