UK unemployment falls, putting rate hike in focus

Wednesday, 18 Dec 2013 | 4:30 AM ET

Britain's unemployment rate fell faster than expected in the three months to October, sliding to 7.4 percent -- its lowest level in four and a half years.

Analysts had expected the rate to remain at 7.6 percent, according to a Reuters poll.

BoE may skew rate debate back to inflation: PIMCO
Mike Amey, portfolio manager at PIMCO, says the Bank of England has some "tricky messaging ahead" regarding forward guidance, as the unemployment threshold looms.

The number of people claiming jobless benefit fell by 36,700 in November, according to the data released by the Office of National Statistics (ONS) Wednesday, while employment rose by 250,000 to a new record high of 30.086 million.

(Read more: UK gears up for 2016 switch to plastic banknotes)

As a result, the U.K.'s unemployment rate is moving closer to 7 percent, which is the Bank of England's (BoE) threshold level for considering a hike in interest rates.

Howard Archer, chief U.K. and European economist at IHS global Insight, said the data boost hopes that a decent rate of growth can be sustained over the coming months.

"This is an extremely strong set of labor market data, indicating that unemployment is currently coming down rapidly in reaction to the economy's markedly improved performance in recent months and much healthier business confidence," he said in a note.

(Read more: UK growth to beat pre-recession peak in 2014: BCC)

Matthew Lloyd | Getty Images News | Getty Images

"The marked drop in the unemployment rate... can only fuel market suspicions that it is very likely to get down to 7 percent before the end of 2014, thereby opening the door to the Bank of England raising interest rates."

But BoE Governor Mark Carney has repeatedly said that the unemployment target would not be an automatic trigger for a rate hike.

The unemployment data come as the latest minutes from the BoE's monetary policy committee (MPC) revealed that members remain dovish. Once again, members voted unanimously to keep interest rates and quantitative easing on hold.

But the MPC did warn that if sterling strengthens further, the country's economic recovery could be at risk. The pound is currently near a five-year high against a number of other currencies.

"Any further substantial appreciation of sterling would pose additional risks to the balance of demand growth and to the recovery," the minutes said.

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