22nd Jan 2014 10:50
LONDON (Alliance News) - The pound has shot higher Wednesday morning in reaction to the latest reading of UK unemployment, which now has almost fallen to the level at which the Bank of England originally said it would begin to look at an interest rate rise.
Meanwhile, UK stock indices are continuing to struggle for direction.
By mid-morning Wednesday, the FTSE 100 is marginally higher at 6,836.70, the FTSE 250 is marginally lower at 16,135.11, and the AIM All-Share is down 0.1% at 880.80.
The headline rate of UK unemployment has dropped to 7.1%, from 7.4%, according to the latest figures from the Office for National Statistics. The reading has beaten consensus expectations of a drop to 7.3%. The number of people out of work fell by 167,000 to 2.32 million in the three months to November.
The ONS also said that the number of people claiming job seekers allowance dropped by 24,000 to 1.25 million in December. This is a slightly smaller drop than the 35,000 that had been expected.
The Bank of England originally guided in August 2013 that it will not raise interest rates until UK unemployment reaches 7%, and that it expected that to happen in mid-2016. However, markets have been pricing in an interest rate rise sooner and sooner as unemployment has since dropped much faster than originally forecast.
"The issue for the Bank of England is that its forward guidance policy is now outdated after just five months. Mark Carney and co. must decide if they cut the unemployment threshold to 6.5% or 6%, or base future interest rate decisions on wage growth rather than solely unemployment," says UFX Markets Managing Director Dennis de Jong.
The pound shot higher in reaction to the latest reading, in both a reaction to the strength of the UK economic recovery and a sign that the Central Bank's forward guidance is largely being ignored. The pound immediately gained about 70 cents against the dollar and has continued to push higher, recording a three-week high of USD1.6550. Against the euro the pound had made a new 12-month high of EUR1.2220.
The Bank of England now faces the challenge of retaining the credibility of its guidance while attempting to control strength in the pound and not risking the UK's recovery. Tuesday's World Economic Update from the IMF suggested that the BoE, along with other central banks, "should keep monetary policy accommodative while fiscal consolidation continues".
Back in October, BOE Deputy Governor Charlie Bean said "if it appears that there is still a substantial degree of slack in the economy which can be absorbed without threatening the achievement of the 2% inflation target in the medium term, then there will be scope to maintain the existing stance of monetary policy longer, perhaps re-setting the unemployment threshold to a new lower level at the same time".
However, the latest minutes from the central bank, released at the same time as the unemployment data, seem to suggest the bank may favour the continued move away from the 7% level being a target and effectively making the the guidance redundant.
The minutes read: "Inflation has returned to the 2% target, however, and cost pressures were subdued. Members therefore saw no immediate need to raise Bank Rate even if the 7% unemployment threshold were to be reached in the near future".
Also released in a busy morning or UK data, public sector borrowing dropped to GBP10.38 billion in December, from GBP15.14 billion in November, beating expectations of a drop to GBP12.3 billion.
Back in the equity market, Sage Group is the biggest gaining blue chip so far Wednesday, up 4.3%. the software company said it was on course to deliver its target of 6% organic revenue growth in 2015, as it saw trading in line with expectations in the first quarter.
Royal Bank of Scotland is proving a drag as the biggest blue-chip faller, down 2.8%. The UK bank was cut to Sell from Neutral by analyst at UBS. Liberum Capital are far more positive on the stock however, having increased its price target Wednesday suggesting that the out-of-favour UK bank will rapidly return to profitability when its internal bad-bank is fully would down.
In the FTSE 250, WH Smith is one of the top gainers, up 2.6% after releasing a stronger than expected Christmas trading statement. Pub chain JD Wetherspoon is also higher, up 2.2% after saying like-for-like sales were up 6.7% in the recent quarter.
Still to come Wednesday, US MBS mortgage applications at midday and the US Redbook of retail sales at 1355 GMT.
By Jon Darby; [email protected]; @jondarby100
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