By Olesya Dmitracova and William Schomberg
LONDON, Sept 11 Britain's unemployment rate
dropped in July to its lowest since late last year, prompting
further market speculation that the Bank of England may raise
interest rates earlier than it has indicated.
The rate dipped to 7.7 percent in the three months ending in
July, the Office for National Statistics said on Wednesday. That
was its lowest since September-November 2012 and confounded most
forecasts for an unchanged reading of 7.8 percent.
To support Britain's burgeoning economic revival, the
central bank says it will not consider raising rates before
unemployment falls to 7 percent, something it does not think
will happen before the third quarter of 2016.
Markets, however, are betting on a much faster decline,
reacting sharply to anything they see as evidence to back their
The pound jumped to a multi-month peak against the dollar
and British government borrowing costs rose, with the premium
over German bond yields back at its highest level in three
years. Gilt prices recovered later, suggesting much of the good
economic news is already priced into the market.
British Prime Minister David Cameron welcomed the fall in
unemployment. Two days earlier, his finance minister, George
Osborne, said the country's economy was turning a corner after
struggling to recover from the financial crisis.
"It's another set of impressive figures," said Investec
economist Victoria Clarke. "It suggests the jobs market is
recovering much like the broader economy. It reinforces our view
that unemployment will come down to 7 percent more quickly than
the Bank of England expects."
All but a handful of economists taking part in a Reuters
poll agreed, saying the unemployment rate would reach the 7
percent threshold before the third quarter of 2016. The poll was
conducted before Wednesday's unemployment numbers.
Investors have priced in the first rise in interest rates
around late 2014 or early 2015. Such bets have led to rises in a
range of market interest rates, including those that usually
feed through to mortgages and other loans.
This risks a future confrontation between the Bank of
England and financial markets. BoE Governor Mark Carney has
warned that the bank might provide more stimulus for the economy
if Britain's recovery is threatened.
The Bank believes the jobless rate will fall sharply in 2014
before easing more gently over the following two years as firms
squeeze more out of current staff. Surveys of British services
and manufacturing last month backed up that view as employment
grew more slowly than overall activity.
But in another sign of surprising strength in Britain's
labour market from Wednesday's data, the number of people
claiming jobless benefit - a narrower and timelier measure of
unemployment - fell by a bigger-than-expected 32,600 in August.
July's fall was also revised to show a drop of 36,300 - the
steepest decline since June 1997.
PAY FALLS FURTHER BEHIND
Not all analysts think that the latest sign of improvement
in the labour market heralds earlier monetary tightening.
"Although employment rose strongly, more timely evidence
from the recent activity surveys suggests that firms are
responding to higher demand more by boosting productivity than
taking on new workers," said Martin Beck, economist at Capital
Forecasting the path of Britain's unemployment has been
complicated in recent years by older workers rejoining or
remaining in the labour force, uncertainty about immigration
levels and job cuts in the public sector.
The ONS said on Wednesday that public-sector employment fell
in the second quarter by 34,000 to 5.665 million.
The data also showed a record number of people working
part-time because they could not find a full-time position -
another potential brake on future growth in the number of
Stronger productivity is unlikely to boost real wages
anytime soon: average weekly earnings growth including bonuses
slowed to 1.1 percent in the three months to July compared with
a year earlier. Excluding bonuses, pay grew 1.0 percent.
By contrast, inflation averaged 2.8 percent over the same
period. Britain's Labour party says falling living standards
undermine the government's claims that its austerity drive
helped the economy by keeping borrowing costs down.
On Wednesday, British supermarket chain ASDA warned of five
more years of hardship for many families. It published a report
saying households will be 1,300 pounds ($2,000) a year worse off
in real terms in 2018 compared with 2009 due to rising costs,
stagnating pay and austerity measures.