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.