Forward guidance not banking on Scottish independence
There are many unknowns surrounding a Scottish vote in favour of independence at next year’s referendum, a potentially huge event for the British economy. But one that has attracted little attention is what it would mean for UK interest rates.
As part of its forward guidance policy, the Bank of England has promised that it will not consider raising rates from record-low levels until unemployment in the UK – 7.69 percent at the most recent reading – falls to 7 percent. It expects this to happen in late 2016, though some investors think the jobless rate could fall much quicker.
The question is, what would happen to Britain’s unemployment, and consequently interest rates, if Scotland decided to leave the UK? Recent data suggest it would take longer for unemployment to hit the Bank’s threshold and prolong the era of cheap money.
It might come as a surprise to some, but Scotland makes a slightly oversized contribution to Britain’s employment. Scotland has had a higher employment rate than any of the other nations within the UK since July 2006, apart from two blips in the middle of 2012 and the end of 2009 to the middle of 2010.
Census data from 2012 show the country makes up 8.38 percent of the UK’s population but had 8.53 percent of its jobs and only 8.07 percent of Britain’s jobless. Without Scotland’s jobs, the UK unemployment rate rises to 7.73 percent.
However, the number of Scottish jobs will only go up by 2.5 percent by 2018, according to a report by PricewaterhouseCoopers, below the national average of 2.9 percent. So it could be that a Scottish exit might hasten an interest rate rise in the rump UK.
Of course it is still too early to tell just what the economic consequences a Scottish departure from the UK would be. The Bank of England might simply decide to leave its forward guidance unchanged, especially if Scotland enters into the currency union proposed by the Scottish National Party.
But a break-up of the union could raise another question mark over a forward guidance policy that Mark Carney has only just started to convince markets they can count on.