Britain jobs data seen casting fresh doubt on BOE forecast

By Scott Hamilton
Courtesy of the Associated Press

(c) 2013, Bloomberg News.

LONDON — British labor-market data Wednesday will probably reinforce investor speculation that unemployment is falling toward the level that could lead to a Bank of England interest-rate increase faster than policymakers forecast.

Jobless claims declined for an 11th month in September and payrolls rose the most since January in the quarter through August, according to Bloomberg News surveys. The unemployment rate, which Governor Mark Carney has linked to the BOE's policy stance, stayed at 7.7 percent, according to a separate poll.

Carney has said policymakers won't consider raising their key interest rate from a record-low 0.5 percent until unemployment falls to 7 percent, something they only expect in late 2016. An improving economy has led investors to push up gilt yields relative to German bunds, and some economists say the BOE will revise its jobless forecast as soon as next month.

"The recovery is running a bit stronger than they had expected," Rob Wood, an economist at Berenberg Bank in London and former BOE official, said in an interview. "We expect the BOE to bring forward the date at which 7 percent unemployment is reached to early 2016."

After growing 0.7 percent in the three months through June, business surveys published by Markit Economics showed factory, services and construction output continued to expand in the third quarter. In services, which accounts for about three quarters of the economy, employment grew at close to its fastest pace in six years in September.

Testifying to lawmakers Monday, Jon Cunliffe, who joins the Bank of England as deputy governor for financial stability next month, said there are "upside risks" to its August growth forecasts, with surveys pointing to above-trend growth in the second half.

Since Carney introduced forward guidance on Aug. 7, short- sterling futures have fallen as investors added to bets on a rate increase. The implied yield on the contract expiring in December 2014 is at 0.89 percent, up from 0.68 percent on Aug. 1.

The 10-year gilt yield has risen 44 basis points since Aug. 1 to 2.80 percent. Investors demand 90 basis points of extra yield to hold British debt instead of German bunds, up from 69 basis points.

"We are more positive over U.K. economic prospects than the MPC and we also suspect that, given the growth outlook, the unemployment figures will continue to decline relatively briskly," said Philip Shaw, an economist at Investec Securities in London. "We are still pencilling in a rate hike in the third quarter of 2015."

A Bloomberg survey published last week showed 21 of 34 respondents saw the jobless rate reaching the threshold by the end of 2015. Five of those predict it happening late next year.

The debate over how fast unemployment will fall centers on productivity. The Bank of England reckons that companies will meet recovering demand from existing workers before they begin to hire, meaning unemployment will fall only gradually.

Policy makers acknowledge the difficulty of forecasting productivity, with Cunliffe describing it yesterday as the "key uncertainty around the medium-term growth outlook."

Unemployment claims probably fell 25,000 in September, and the number of people employed surged 125,000 between June and August, according to median forecasts in Bloomberg surveys. The data are due to be published by the Office for National Statistics at 9:30 a.m. Wednesday.

Data Tuesday showed the annual inflation rate unexpectedly stayed at 2.7 percent in September as air fares offset a drop in gasoline prices. The median forecast in a Bloomberg survey was 2.6 percent. House prices climbed to a record in August, driven by London.

With the economy strengthening — the National Institute of Economic and Social Research predicts growth accelerated to 0.8 percent in the third quarter — BOE policy makers may revise their jobless forecast in their quarterly outlook next month, according to Ross Walker, an economist at Royal Bank of Scotland Group in London.

Wednesday's unemployment data will present "a further challenge to the dovish monetary policy guidance desired by the Treasury and BOE," Walker said. They will be published "just as the MPC's November Inflation Report forecast round gets under way, increasing the pressure in the bank to revise its policy guidance," he said.

bc-britain-jobs (TPN)