UK unemployment: challenge for Carney as jobless rate expected to fall

Falling unemployment has raised speculation the Bank of England could alter or abandon its forward guidance policy

Britain's unemployment rate is expected to have come down again when official data are released on Wednesday morning, bringing cheer to the government but a challenge to the Bank of England.

Economists forecast the jobless rate edged down to 7.3% in the three months to November from 7.4% in the three months to October, according to a Reuters poll.

That would be the lowest rate for more than four-and-a-half years and continues the trend of unemployment falling faster than BoE policymakers had been expecting. That has raised speculation the Bank will alter, or even abandon, its forward guidance policy, under which it vows not to consider an interest rate rise until unemployment has fallen to 7%.

The improving headline figures on the labour market from the Office for National Statistics echo business surveys indicating many firms are more optimistic about hiring now the recovery is picking up pace.

"We believe that it should be very easy for the unemployment rate to fall to 7.3% in this week's November reading and more likely will fall to 7.2%," says Alan Clarke, economist at Scotiabank.

James Knightley at ING said the labour market data was likely to show "broad strength".

"The UK has created nearly 1.3 million jobs since the nadir of the labour market in early 2010, 250,000 of them in the past three months alone. Initially they were largely part-time jobs focused in London and the south-east, but increasingly they are full-time positions and located all around the country," he said.

The latest manufacturing sector survey from the CBI on Tuesday showed a bigger proportion of companies expect to lift their employment over the coming quarter. Howard Archer, economist at IHS Global Insight, said that "fuels belief that the unemployment rate could very well get down to the critical 7% threshold level, under which the Bank of England could raise interest rates, by the middle of this year".

But not everyone believes the jobs recovery is evenly spread across the UK. The TUC trade unions group this week said the recent pickup in jobs had failed to reach the north-east, the north-west, Wales and the south-west, leaving them in the same situation or worse at providing jobs than they were 20 years ago.

At the same time, although employment has picked up, wage rises have remained on average below inflation, meaning many workers are worse off in real terms.

Economists forecast Wednesday's data will show annual average earnings growth of 1% for November, excluding bonuses. That marks an increase from 0.8% growth in October but is still well below inflation which came in at 2% for December.

At the same time as the unemployment data, the Bank of England releases the minutes to its latest policy meeting. Policymakers held rates at their record low of 0.5% at the meeting but economists think there was probably a discussion among members of the monetary policy committee (MPC) as to whether the unemployment threshold should be lowered.

Samuel Tombs at the thinktank Capital Economics said: "Some of the more hawkish members might be in favour of sticking to the original guidance. But we suspect that a majority will have begun to consider how they could alter their guidance in order to get market interest rates and sterling down from present levels that, if left unchecked, could soon begin to take some of the pace out of the recovery. Indeed, we believe that there is a strong chance that the MPC will lower the unemployment threshold next month to coincide with the Inflation Report."

Some economists say it is time to move on from forward guidance.

Rob Wood, chief UK economist at Berenberg bank, says the Bank should "let forward guidance wither" and return to targeting inflation.

"When the BoE introduced forward guidance just six months ago, they saw only a 50% chance that unemployment would fall to 7% by mid-2016. That is now likely in the next few months," he said.

"Lowering the unemployment threshold would unnecessarily tether the BoE to a dangerously low target. A rate rise is not needed now, but it will be needed before unemployment gets to 6.5%."

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