MPC divided on rates decision as unemployment hits six-year high

Jobs creation fails to keep pace with increase in workforce. Blanchflower voted against rise
Click to follow

Unemployment rose to a six-year high in July as an influx of immigrants and a record number of over-50s seeking work meant companies could not find jobs for everyone joining the labour market.

Concerns about the jobless rate creeping up split the Bank of England's Monetary Policy Committee at its August meeting, prompting its newest member, David Blanchflower, to vote against lifting interest rates by 25 basis points to 4.75 per cent.

The pound slipped against the euro as the City bet against another imminent rate rise after the August minutes implied the MPC was in no rush to repeat its actions. "An early increase in rates would reduce the risk that a sharper rise would be needed later," the committee felt.

The number of people looking for work rose by 92,000 in the three months to 1.68 million, a rise of 243,000 over the previous year. This pushed the jobless rate to 5.5 per cent, up 0.3 per cent on the previous quarter and the highest since early 2000, the Office for National Statistics said.

The number claiming benefits edged closer to the politically sensitive 1 million mark, rising 2,000 to 957,000. Although the claimant count has climbed for 16 out of the past 17 months, July's increase was at the lowest rate since January, suggesting the rising trend is easing.

Despite the loosening labour market, the outlook for those out of work was not totally bleak. The number of people in jobs also rose, with the total employment level hitting a high since records began in 1971 as 42,000 more people joined the workforce in the three months to June than during the previous quarter. The workforce has expanded to accommodate as many as half a million immigrants from eastern Europe, vastly more than the Government predicted when the European Union enlarged its borders.

Official figures showed the total number in work hit 28.9 million, an annual increase of 240,000 as the number of females and pensioners seeking jobs all soared. There was also a fall in the number of people incapacitated by long-term illnesses. The inactivity rate fell 0.2 percentage points over the quarter to 21 per cent, which was the lowest level since May 1992.

John Philpott, labour market economist at the Chartered Institute of Personnel and Development, said: "With demand for labour improving, the continuing rise in unemployment is now clearly driven by strong growth in labour supply as more immigrants enter the jobs market and the Government gets better at getting the economically inactive jobless to look for work."

With Mervyn King, the Bank's governor, on red alert for signs that record oil prices are having a knock-on effect elsewhere in the economy, the surprise jump in average earnings unnerved some economists.

Including bonuses, workers' pay jumped 4.3 per cent in the quarter to June, up 0.2 percentage points on the May rate. A separate report from the ONS showed bonus payments between 2005 and 2006 had increased by a record £2.5bn since it began tracking the data in 2002. The rise in average earnings was driven by higher bonuses in the financial services sector and by a 5.9 per cent increase in the wages of manufacturing workers, which reflects the fact that most of the jobs lost in UK manufacturing are at the lower-paid, unskilled end of the sector.

"Should we get excited about a small rise in wage growth?" asked John Butler, UK economist, at HSBC. "No. If this trend continues, it may confirm the Bank of England's fear of second-round effects [of the oil price]. But for now, wage growth remains incredibly low. Headline wage growth of 4.3 per cent is still well below the 4.5-to-4.75 per cent range we believe is consistent with meeting the inflation target on an ongoing basis," he added.

The dovish tone of the MPC minutes surprised many in the City. The MPC members mulled whether "an immediate increase was justified, or whether there was a case for delay", concluding "... there would be time to reverse any increase should that prove necessary". Mr Blanchflower was the sole dissenter of the seven-strong committee.

David Hillier, at Barclays Capital, said: "That doesn't sound like a committee with its eye on the next increase. It sounds more like a committee that is concerned a 25 basis-point rate rise might actually prove too much."

Philip Shaw, at Investec, concurred. "The minutes did not convey the impression that the committee is looking towards an aggressive series of interest rate increases. Our best guess is that we'll see another tightening in November, based on the concerns raised in the Inflation Report, but it will depend... on the pace of growth and consumer demand," he said.

Last week, Mr King implied rates would need to rise further when he said there was a "50/50" chance inflation would exceed 3 per cent in the next six months, requiring him to write a letter of explanation to the Chancellor.