Interest rates to remain ‘higher for longer’ if ‘experimental’ data turns out to be true
Economists warned that interest rates will have to remain higher for longer if the rate of unemployment is as low as previously unreported experimental figures suggest.
The figures were published by the Office for National Statistics (ONS) last month and are based on the earliest indicators from the Transformed Labour Force Survey, which the ONS hopes to roll out next March.
It showed that unemployment fell to 3.5 per cent in the three months to May, although the ONS said “we would put no weight on the rates”, pointing out that they were both “indicative and experimental”.
The Financial Times first reported the release.
If these figures were correct, then it would mean unemployment has hit its lowest level since the 1970s. Previous estimates showed that unemployment in the three months to May was 3.7 per cent.
The new figures also suggest that the unemployment rate may have only risen to 3.8 per cent in the three months to August, lower than the 4.2 per cent estimated by the ONS – although the comparison is not direct due to differing methodologies.
“This suggests that labour market conditions may have remained tighter than we previously thought,” Ashley Webb, UK economist at Capital Economics told City A.M.
“If that’s the case, that may mean that interest rates may need to remain high for longer,” he said.
Similarly, Dan Hanson, economist at Bloomberg Economics suggested that if the figures turn out to be correct, “we can expect Andrew Bailey and his colleagues to push back even harder against the idea that interest rate cuts are around the corner”.
The ONS has been forced to improve the accuracy of its flagship Labour Force Survey after falling response rates raised questions about the accuracy of the data. Last month the ONS opted to publish “experimental” estimates for the labour market based on more real time indicators.
Andrew Goodwin, chief UK economist at Oxford Economics, said the new figures were consistent with the consultancy’s own set of data which suggested that loosening in the labour market was “much less pronounced” than had first been thought.
However, he warned that markets should not get carried away with the data given the experimental nature of the data.
“It would be easy to conclude from this series that the labour market is very tight and further rate hikes are needed, but I don’t think that’s the case,” he said.
Indeed, the Bank of England was aware of the data when it made its most recent decision on interest rates. In a footnote on the final page of the November Monetary Policy Report, it pointed out the figures were “only indicative and are not seasonally adjusted”.