The U.K's jobless rate – a key part of the Bank of England's interest rate policy – held steady in the three months to August, but the number of people claiming unemployment benefits fell much more than expected last month.
The unemployment rate remained at 7.7 percent between June-August, the Office of National Statistics said on Wednesday, with employment rising by 155,000. Youth unemployment was little changed, with 958,000 16-24-year-olds unemployed over the three months.
In September, however, the claimant count fell by 41,700 - the biggest monthly fall since June 1997.
"The U.K. is firing on all cylinders," Alan Clarke, U.K. and euro zone economist at Scotiabank. He had, however, expected a fall in the unemployment rate to 7.6 percent.
"Employment probably didn't pick up as much as it should have done," he said, highlighting that the claimant count comes out one month ahead of the broader unemployment rate. "It didn't happen today, but should do next month."
Sterling moved higher by over 0.16 percent against the dollar following the news.
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Britain's unemployment rate has taken on new significance since the country's central bank issued "forward guidance," vowing to keep interest rates at their record low of 0.5 percent until the rate falls below 7 percent. Bank of England Governor Mark Carney has said he expects this to take around three years.
Generally, however, investors have been unconvinced by the central bank's predictions, believing that unemployment will fall faster, boosting the chance of a rate hike earlier than the Bank of England expects.
"This is a pretty robust set of labor market data overall, which will probably fuel market suspicion that the Bank of England will likely end up hiking interest early in 2015 or even in late-2014, and certainly well before mid-2016," said Howard Archer, chief U.K. and European economist at IHS Global Insight.
"Although the unemployment rate was stable at 7.7 percent in the three months to August, the healthy overall tone of the labor market data does little to dilute expectations that it will get down to 7.0 percent well before the Bank of England is currently forecasting."
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The data also revealed that although the U.K.'s labor market was showing signs of improvement, living standards remained under pressure. Earnings growth (including bonuses) slowed to 0.7 percent over the three months to August.
It came a day after U.K. inflation data surprised on the upside. Economists had expected the Consumer Prices Index (CPI) to fall year-on-year, but it came in unchanged at 2.7 percent in September.
"This is the bizarre thing about the U.K. economy," Clarke added. "People's real disposable income growth is negative, but because the housing market is on fire, people are going out and spending money that they don't really have."
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