Unemployment at 7.1%: Will Carney rethink his 7% trigger?

The scope for the Bank of England to revisit its triggers for changing monetary policy could be revisited following improving employment numbers.

According to the Office of National Statistics, unemployment has fallen to 7.1 per cent.

In the first use of forward guidance by a BoE governor, Mark Carney stated that if an unemployment rate of 7 per cent would be one of the triggers for asking whether monetary policy should be tightened.

However, BlackRock head of fixed income asset allocation Benjamin Brodsky believes the BoE may re-examine this threshold.

Brodsky says: “We expect the BoE to move more away from unemployment as a target and talk more about inflation. 

“This will give them more room and I would personally be surprised if they hiked up rates this year.”

Capital Economics UK economist Samuel Tombs also believes the BoE may revisit its conditions for changing monetary policy, reflecting that the January Monetary Policy Committee meeting’s minutes explicitly showed there was no “immediate need” to raise the bank rate even if the 7 per cent trigger was reached.

Tombs says: “It was also suggested that the improvement in the labour market figures may overstate the degree to which conditions have tightened. As a result, we think that there is a strong chance that the committee will alter its forward guidance alongside next month’s inflation report in order to provide the recovery with more support.” 

However Fidelity Worldwide Investment director of asset allocation Trevor Greetham expects rates to rise quicker faster than markets might expect.

This is because he does aggree with all the reasons the Bank gives for rates being expected to remain low – inflation  likely to remain subdued; weak global growth meaning weak exports; and continued headwinds from the financial crisis.

”I believe inflation will remain subdued with China going ex-growth and commodity prices falling. However, I do not believe exports will be a source of weakness with global growth picking led by the US and with euro area growth improving. Nor do I believe financial crisis headwinds will restrain the recovery given the housing-led nature of this upturn and the obvious willingness of banks to lend for mortgages given the high spreads they can now charge,” Greetham says. 

“Base rates are likely to rise sooner than the market expects. With government strategy encouraging consumers to lever up their balance sheets further the economy is likely to be very sensitive to interest rate rises so the BoE won’t have to try too hard if they want to slow things down.”

Royal London Asset Management economist Ian Kernohan sees this quickly falling unemployment rate as a problem for the BoE which under its new governance has made forward guidance a prominent weapon in its arsenal.

Kernohan says: “With unemployment still significantly higher that its pre-recession level and wage growth still muted, there may be some merit in lowering the threshold, or in using Fed-style language to play down its importance. Either way, the bank faces a communications problem.”

Hargreaves Lansdown senior investment manager Adrian Lowcock is aware that despite unemployment nearing Carney’s trigger to reassess the Bank’s stance, the economy as a whole is still too fragile for a change in monetary policy.

Lowcock says: “We think it is unlikely interest rates will rise this year. Inflation has been falling and therefore there is little pressure to raise interest rates. 

“The economic recovery remains fragile and Carney must be mindful that a rise in interest rates would push up borrowing costs, including mortgage interest payments. Investors should be prepared for interest rates to remain lower, probably into 2015.”