BOE Warns Further Sterling Gains Could Threaten Recovery
U.K. Unemployment Rate Falls to 7.4%
LONDON—The Bank of England's Monetary Policy Committee Wednesday said any further "substantial" appreciation of sterling could slow the U.K.'s economic recovery, as a surprise decline in the unemployment rate pushed the currency higher.
The minutes from the MPC's December meeting showed that all nine members supported the decision to leave the central bank's benchmark interest rate at a record low of 0.5% and its bond purchases unchanged at £375 billion ($609 billion).
In August, the MPC pledged not to consider an increase in the benchmark rate until the unemployment rate had fallen to 7%, unless there were signs that inflation or expectations of future price rises were picking up strongly.
MPC members agreed there were no such signs, with government efforts to slow a rise in home energy prices likely to bring the annual rate of inflation closer to the BOE's target of 2.0% in the first quarter of next year.
Figures released Wednesday by the Office for National Statistics showed the unemployment rate fell unexpectedly to 7.4% in the three months to October, indicating the central bank may raise its benchmark rate sooner than anticipated.
BOE Gov. Mark Carney conceded in November that the unemployment rate was falling more quickly than the committee members had expected when they initiated forward guidance, and could hit the 7% threshold by mid-2015. The drop reported Wednesday, however, suggests that rate could now be reached even sooner.
The ONS said the unemployment rate fell to the lowest level since the three months to April 2009, from 7.6% in the three months to September. The total number of unemployed people fell by 99,000 in the three months to October, the biggest drop since August 2000. That pushed the unemployment level down to 2.39 million, the lowest total since May 2009.
The data came as a surprise, as economists had forecast no change from the September rate of 7.6%.
In addition, the more timely claimant count measure of the number of Britons claiming jobless benefit fell for a 13th consecutive month in November, indicating that the unemployment rate could continue to decline.
In response to the surprise fall in the unemployment rate, sterling appreciated on the currency markets, rising to $1.6350 from $1.6315 before the data were published.
The MPC said the most recent economic data points to a "burgeoning recovery," but warned that might be vulnerable to further gains in the pound, which has already risen 2% over the previous month and 9% since March.
"Any further substantial appreciation of sterling would pose additional risks to the balance of demand growth and to the recovery," the MPC said.
The U.K. economy grew at the fastest rate in more than three years, outpacing its counterparts, in the three months to September, and the BOE forecasts a growth rate of 0.9% in the final three months of 2013, according to the minutes. The U.K.'s strong performance has led investors and traders to believe the BOE will begin raising its benchmark interest rate well before the European Central Bank does the same.
The MPC has long believed that for a recovery to be sustained, exports will have to play a bigger role. But with demand from the euro zone still weak, an appreciating currency would make that less likely.
Recent data indicates that the U.K.'s recovery is being driven by consumer spending, with business investment yet to pick up. According to the minutes, the MPC worried that without an increase in productivity and real incomes, consumer spending may weaken. The ONS data showed that while the jobs market is showing increasing signs of recovery, personal earnings growth remains subdued and held at the record low rate of 0.8% in the three months to October, unchanged from September and August.
"There had been some signs of softness in recent consumer spending data and confidence surveys," the minutes said.
The minutes revealed that MPC members continued to be puzzled by the absence of a rise in productivity as the economy recovered, but agreed it is too early to conclude that rising demand will generate inflationary pressures.
"It was…too soon to draw firm conclusions on the responsiveness of effective supply to stronger demand," the minutes said.