Labour Market Statistics, January 2014: Who wants to be in Carney's Place?

If you walk from my home to the centre of Brixton, along Coldharbour Lane, you pass two new housing developments under construction.  In the late summer, a big sign was put on the front of one of them - Carney Place.

Was this, I wondered, a thank you present to the new Governor of the Bank of England (and patron saint of house builders) whose Forward Guidance for monetary policy, published at the beginning of August last year, appeared to offer the prospect of very low interest rates for some time to come, perhaps well into 2016?

At the time the Forward Guidance was published, 2016 was the Bank's estimate of when UK unemployment would hit the 7% threshold required to trigger a review of the current monetary policy stance.  Commenting on this in my August blog, I said: "Continued expansion through recruitment could mean that unemployment falls faster than the Bank expect.  In my end of 2013 blog, looking ahead to 2014, I really stuck my head above the parapet:  "So we could see employment rise by more than 300,000, perhaps by another half a million. If this turned out to be the case, the "magic" 7% unemployment rate will be reached during 2014."

Just over three weeks later, and we are almost at 7%.  And remember, this figure refers to the period September-November 2013.  There is a good chance that unemployment was already below 7% when I wrote my end of year blog - it's just we don't have the data yet.

This helps to remind us just how quickly the labour market has expanded in recent months and just how big the fall in unemployment was in this week's statistics.  It knocked not one but three decimal points off the unemployment rate, down to 7.1%, and the size of the reduction, 167,000, is the largest for 17 years.  There was lots of supporting good news too, such as the reduction in youth unemployment and long-term unemployment.

The headline unemployment rate is, of course, estimated from a sample survey.  This means there are margins of error and we might not see such big falls either next month or in coming months - it could be a one-off.  But the downwards trend is now clear.  It is consistent with forecasts for economic growth and forward expectations for employment (as measured by recruitment surveys and our own CIPD Labour Market Outlook).  In a very few month's time - in theory as early as the March meeting, more likely April or May - the Monetary Policy Committee (MPC) will meet in the knowledge that unemployment has hit the 7% threshold.

This does not mean we will see an immediate rise in interest rates.  The Forward Guidance always specified that the 7% would only be the point when the current policy stance might be re-considered.  In practice, the MPC will only raise interest rates when they think it is necessary to ensure inflation will remain within its target range.  At present, inflation is coming down, not going up.  December last year was the first time that inflation was not above its 2% target value since November 2009.  Wage growth is still very subdued and forward indicators, such as our Labour Market Outlook, suggest we are unlikely to see any quick increase in average earnings growth.  So unless house prices unsettle the MPC, we should see no immediate move on interest rates.

However, in the medium term, the MPC does face a dilemma.  Committee members will know that, at some stage, interest rates will have to rise closer to those prevailing in "normal" economic conditions (with a 2% inflation target, base rates of 4-5%).  But how do they get to there from the current base rate of 0.25%?  Do they start relatively soon through a progressive series of small rate increases - and risk cooling the economy down before it has really heated up?  Or do they wait until there is clear evidence of inflationary pressure and then move decisively with relatively large and quick rate increases - and risk a housing market crash or other such economic dislocation?

There are no easy answers.  We may soon monetary policy decisions becoming interesting again.  And if the MPC can navigate us through the coming years safely, perhaps Mr Carney will be given the show flat in the development that bears his name as a leaving present?

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