Mortgage blog: Unemployment falls, is it nearly time for an interest rate rise?

Posted 7 February 2014

Unemployment in the UK fell faster than expected at the end of 2013, raising speculation that the Bank of England could be set to increase mortgage rates. The jobless total fell by 167,000 in the three months to November and is now 7.1%, just 0.1% above the threshold at which the Bank said they would consider a hike in interest rates.

So, with unemployment falling faster than anticipated should millions of mortgage borrowers expect their payments to rise in 2014?

Unemployment threshold not an automatic trigger for a mortgage rate rise

Last August, the Bank of England put unemployment at the heart of its monetary policy when it said it would not think about raising the base rate - which has been at its record low of 0.5% since 2009 - until the unemployment rate fell to 7%.

With unemployment falling faster than expected the rate is now 7.1%, just a fraction above the point at which the Bank said it would consider raising mortgage borrowing costs.

However, to quell speculation that the Bank may raise interest rates sooner than expected, Governor Mark Carney has repeatedly stressed that unemployment falling to 7% would not be an automatic trigger for a rate hike.

The minutes of the Monetary Policy Committee meeting in January said that they now expect unemployment to hit 7% "materially earlier than previously expected" and that the equilibrium employment "might be lower than previously thought". The minutes said: "Members therefore saw no immediate need to raise Bank Rate even if the 7% unemployment threshold were to be reached in the near future."

The minutes also made clear that when an interest rate rise does eventually come, fragile prospects for growth and low inflation means moves will be gradual.

The BoE is expected to update its forward guidance policy next month, possibly by lowering the threshold unemployment rate below 7% or by restating that the threshold is not an automatic trigger.

Keith Osborne, editor of Whathouse.co.uk, says: "Unemployment is falling much more quickly than anticipated and so the Bank's threshold is likely to be reached in 2014 rather than in 2016 as originally predicted. However, the 7% unemployment figure was only ever a trigger to consider a rate rise and with inflation falling I don't expect the Bank to rush into raising mortgage borrowing costs for millions of homeowners."

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