Unemployment and inflation fall

There was good news for the Bank of England this week as UK unemployment fell to 7.4% in the three months to October, the lowest rate since 2009, and inflation hit a four-year low of 2.1% in November.

However, minutes from the Bank’s December meeting revealed that members of the interest-rate setting Monetary Policy Committee (MPC) were starting to worry about the strength of the pound. Sterling is near a five-year high against other major currencies.

What the commentators said

The rapid fall in unemployment suggests that the jobless rate will hit 7% faster than anyone had expected. That’s significant, because it’s the threshold below which the Bank of England is expected to start considering hiking interest rates, according to governor Mark Carney’s ‘forward guidance’ policy, said Samuel Tombs of Capital Economics.

Yet even if unemployment does hit 7% soon, the December meeting minutes suggest the central bank is in no hurry to raise rates. On that front, “the benign inflation outlook will enable the MPC to keep interest rates on hold for a long time yet”.

Households will also welcome the slowdown in the rate of inflation – rising consumer prices have squeezed spending, said Hugh Pym at BBC News. But they can’t count their chickens yet.

One factor leading the drop in the inflation rate was food prices – prices were little changed in November, whereas in the same month of last year they rose. But increases in the cost of living are still running ahead of average pay rises, and the November inflation figures do not take into account the latest increases in utility bills.

However, the Bank’s concerns about sterling suggest it might be more worried about disinflationary pressures, said Kathleen Brooks of Forex.com. While the Bank shows no sign of intervening yet, if the pound heads towards the 1.70 level against the dollar, it may act – a strong pound looks “like the biggest threat to the UK’s recovery right now”.

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