No Interest Rate Rise

Unemployment has fallen to 7.1% - the lowest rate since March 2009. But this is not a sufficient trigger for the Bank of England to raise interest rates

Emma Wall 22 January, 2014 | 12:00PM
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Unemployment has fallen to 7.1% - just 0.1% off the interest rate rise trigger of 7%. Despite this, the Monetary Policy Committee is expected to sit tight and hold interest rates at the record low of 0.5% for the 59th month in a row. 

On August 7 last year, Bank of England governor Mark Carney set out a plan designed to offer savers, borrowers and the City some stability regarding interest rates. Carney announced that the Bank would be implementing ‘forward guidance’, a policy that dictates certain economic goals must be met before interest rates could rise.

Although his speech was peppered with caveats, Carney promised that the Bank would not be raising rates until unemployment had fallen to 7% or less. That threshold is now within grasp - and yesterday we saw the International Monetary Fund upgraded its forecasts for UK GDP growth to 2.4% for 2014.

Despite positive economic indicators, Andy Scott of currency specialists HiFX noted the Bank’s minutes from its meeting this month made it clear it is still in no hurry to increase interest rates despite the improving economy.

"Clearly the Bank is going to have to adjust its forward guidance now to give the market an idea of when it may increase interest rates since we’re practically at the threshold now," he said.

"The market is now pricing in the first rate hike in April 2015 following this morning’s data and expectations of a hike next year will continue to make sterling look attractive, particularly against the euro which could still see monetary policy eased due to very low inflation."

Carney has somewhat become a victim of his own success – nobody expected the jobs market to improve so significantly in such a short space of time. Instead of using the measures set out by forward guidance, savers should expect to wait some time before they feel the benefits of an interest rate rise.

Chief economist at currency exchange company World First, Jeremy Cook said we were unlikely to see a change in interest rate policy for the foreseeable future.

“Despite the recent anecdotal data that wage pressure is building we are still waiting for the majority of employees to get back above 1.0% wage inflation let alone the official inflation rate of 2.0%,” he said. “Rate hikes are unlikely to be popular in an environment of falling real wages.”



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Emma Wall  is former Senior International Editor for Morningstar

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