New governor Mark Carney’s changes to monetary policy mean that interest rates are likely to be kept at 0.5 per cent until unemployment falls to below seven per cent, and that hikes will be considered afterward.
With new data on unemployment released this Wednesday, the direction of travel for Britain’s labour market is likely to weigh heavily on markets, according to new analysis. A particularly positive or negative streak for unemployment may change the point at which a hike in interest rates is expected.
Capital Economics’ assessment of the new forward guidance said: “Markets may think the MPC is wrong about how slowly unemployment will fall. After all, the MPC’s forecast means unemployment falling by less than one percentage point from its current 7.8 per cent rate over the next three years – even though the MPC revised up its GDP growth forecasts fairly significantly.”
The Chartered Institute of Personnel and Development’s (CIPD) view of employment prospects is positive, suggesting a readiness to hire again.
Its labour market outlook indicates that the highest proportion of firms now intend to hire employees since the onset of recession in 2008.
The Bank’s own forecasts predict that unemployment will fall below seven per cent at some point late in 2016, but any indication that the threshold could be reached at an earlier or later date could add to financial volatility.
IHS Global Insight’s chief economist, Howard Archer, expects unemployment to fall to 7.6 per cent this year, from 7.8 per cent currently, and to reach Carney’s seven per cent threshold in early 2016, causing the monetary policy committee (MPC) to reconsider historically low rates.
Archer added: “We have become more upbeat about job prospects and have trimmed our unemployment forecasts.”