The strength of the jobs market has caught rate-setters at the Bank of England off guard, official minutes from the monetary policy committee revealed today.
Threadneedle Street said it “seemed probable” unemployment would be lower in the second half of 2013 than the Bank expected in its August Inflation Report.
Under its new forward guidance policy, the Bank has pledged to keep rates on hold until unemployment falls below 7%, which it initially expected to occur in the second half of 2016.
However, robust growth in employment since the summer, which has pushed the jobless rate down from 7.8% to 7.7%, has prompted Threadneedle Street to recalculate and the central bank is now likely to revise its jobless forecasts down next month.
Money market rates show City traders expect the Bank, led by Mark Carney, to start raising policy rates in early 2015, but Bank policymakers have repeatedly stressed that even if unemployment does drop rapidly to 7% it would not necessarily trigger a rate hike.
And today’s minutes showed some MPC members feel it is “too soon” to judge how productivity will respond to the recovery. A pick-up in productivity — output per hour worked — could dampen employment growth.
Yet some City analysts today reiterated their expectations of an early rate rise. “We still feel policy tightening could start in early 2015,” said James Knightley of ING.
The minutes also showed the nine-man MPC voted unanimously earlier this month to keep its £375 billion quantitative easing policy on hold, as the economy continues to strengthen.
Members further said that GDP growth was likely to average 0.7% a quarter in the second half of the year, an upward revision from their August forecast.
They said there was little likelihood of the inflation “knockout” for forward guidance being triggered and noted that the recent strengthening of sterling would help contain domestic price rises.
On Friday the Office for National Statistics will release its first estimate of growth in the third quarter of 2013, with City economists predicting a 0.8% expansion over the three-month period.
Following 0.4% growth in the first quarter and 0.7% in the second, this would represent the strongest period of UK growth since 2010.