Economists predict shift in forward guidance rate trigger

Unemployment is falling faster than forecast and this may persuade Mark Carney, Bank of England governor, to change his forward guidance to lower the unemployment trigger to 6.5 per cent 6.5 per cent, economists have predicted.

Ruth Lea, economic adviser to the Arbuthnot Banking Group, acknowledged widespread speculation that Mr Carney may change his forward guidance as the ongoing recovery may lead to the previous trigger of 7 per cent being hit earlier than expected by the middle of this year.

The bank’s current threshold for considering a rise in interest rates is an unemployment rate of 7 per cent. Speculation has therefore mounted that the threshold could be revised down to 6.5 per cent, equal to the rate in the US.

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Ms Lea said: “The labour market is certainly improving quite rapidly. Unemployment in the three months to October fell by 99,000 compared with the previous quarter, down 121,000 on a year earlier.

“The fall in the unemployment rate to 7.4 per cent was quite unexpected. This is the lowest rate since the three months to April 2009, when the rate was 7.3 per cent.

“If current trends are sustained, unemployment will clearly be falling significantly quicker than anticipated by the Bank in November.”

In the November Inflation Report the bank estimated that there was a 2 in 5 chance that the 7 per cent threshold unemployment rate would be reached by end-2014 and a 3 in 5 chance that it would be reached by end-2015.

She said: “The odds that the unemployment rate will drop to 7 per cent by mid-2014 (never mind end-2014) must be shortening rapidly.”