Britain’s economy roars back to health

Just as the International Monetary Fund (IMF) raised its 2014 forecast for Britain’s growth from 1.9% to 2.4%, the latest UK jobs data revealed the strongest employment growth in 40 years. The headline unemployment rate slid from 7.4% to 7.1% in the three months to November.

While the strong jobs market is a good sign for the economy – and good news for the government – investors were a little concerned that the Bank of England may end up having to raise interest rates sooner than expected.

What the commentators said

The IMF is always “behind the curve”, said Jeremy Warner in The Daily Telegraph. “When the world finally ends… the IMF, with its eyes firmly set on the rear-view mirror, will have been among the last to see it coming.”

Less than a year ago the IMF was fretting that UK growth could flat-line for years. The big question now is what this surprising strength in the labour market might mean for interest rates.

Last summer the Bank of England said it wouldn’t consider raising borrowing costs until the jobless rate has fallen to 7%. It didn’t expect the threshold to be met for two years. But as Philip Shaw of Investec noted, “it’s quite possible” we will be at the Bank’s threshold in a month’s time. “There will have to be a change in guidance relatively soon.”

The minutes of the Bank’s January meeting noted that the 7% mark was not an automatic trigger for rate rises, and any hikes will be gradual, said Bank of America Merrill Lynch (BAML). Expect an update to the guidance in February’s Inflation Report.

The Bank could say it is moving the unemployment rate threshold down to 6.5%, or be more specific about keeping rates on hold for some time after the 7% target is met. Rates are still unlikely to rise before February 2015, reckons BAML. This dovishness should keep a lid on the pound.

Merryn

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