UK unemployment — the monthly monetary policy guide

By Mike Peacock
September 11, 2013

Of the week’s economic data, today’s UK unemployment stands out since the Bank of England has pegged any move up in interest rates to a fall in the unemployment rate from 7.8 percent to below 7.0. The rate is forecast to have held at 7.8 percent in July.

Bank of England Governor Mark Carney has struggled to convince markets of his contention that interest rates are unlikely to rise for three years because the jobless rate will fall only very slowly. Interest rate futures – short sterling – spiked higher after last week’s policy meeting which offered no change of direction and no statement.

There are some key imponderables:
1. To what extent UK firms have kept workers on but worked them less (its certainly true that the jobless rate rose less than expected during Britain’s recession), leaving plenty of scope to ramp up as growth returns without hiring large numbers of new staff.
2. The economy is still three percent smaller than it was in 2008 but no one is quite sure how much activity has been permanently lost during the financial crisis so the size of the output gap is uncertain and therefore so is the level of output at which price pressures start to build.
3. Most importantly, with the Federal Reserve poised to act, can a country like Britain possibly divorce itself from the world’s economic superpower as it sets the global terms of monetary policy?

Carney and colleagues get another chance tomorrow to convince markets of their forward guidance when they testify to a parliamentary committee on their last quarterly inflation report. Monetary Policy Committee member David Miles speaks later today.

European Commission President Jose Manuel Barroso marks the end of the EU’s summer shutdown with his annual speech on the state of the bloc. It tends to be a tour d’horizon of what’s being done to overhaul economies, deepen integration and generally improve the lot of all member states, but it can include specific policy proposals.

In the past, Barroso has raised the possibility of common euro-area bonds, which Germany flatly rejects, and could this year also come up with new ideas for strengthening the euro zone’s economic union.

That this is work in progress is beyond question. Looking past the usual flashpoints of Greece, Portugal, Italy, Cyprus etc, yesterday EU lawyers said a plan to tax financial transactions in 11 EU members states was illegal and the pace of progress on banking union would embarrass a snail.

That could change after Germany’s elections in just over a week but no one is certain. Last night, at least, the European Parliament and European Central Bank reached a compromise so that MEPs will vote through the new bank supervisory powers to be housed at the ECB from next year.

And what’s this? It’s openly acknowledged that Greece will need more financial help to get back on its feet (despite the further cost that will impose on euro zone taxpayers) but ECB policymaker Luc Coene has just hit the wires saying Greece will need more aid not just once but possibly twice.

Italy remains the biggest flashpoint for now. Yesterday, its borrowing costs rose above Spain’s for the first time in 18 months while a Senate committee charged with ruling on Silvio Berlusconi’s political future after his conviction for tax fraud backed off holding a vote after allies of the former premier threatened to bring down a shaky governing coalition.

Hearings will resume on Thursday. The centre-left PD and anti-establishment Five Star movement certainly have the numbers on the committee to press for Berlusconi’s expulsion from political life but it looks like the process is going to take some time. And it will ultimately require a full Senate vote.

Against that backdrop, Rome will sell up to 11.5 billion euros of treasury bills today, ahead of a tripartite bond auction tomorrow which aims to raise 7.5 billion.
Italy was well ahead of the game in terms of meeting its 2013 funding needs but yesterday the Treasury asked parliament to raise the ceiling on this year’s net debt issuance to 98 billion euros from 80 billion, given the struggle to rein in public finances. So the pressure is well and truly back on.

French Finance Minister Pierre Moscovici will set out updated growth and deficit forecasts. Yesterday he said an extra year, until 2015, would be taken to bring France’s budget deficit down to the EU’s three percent of GDP target. Brussels has already granted that leeway. The concern there is more with the pace of structural reforms, most recently to the debt-laden pension system. To date, only small increases to the size and duration of pension contributions are in train with retirement benefits left untouched. Even within France there is recognition that something more radical will be required in the end.

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