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Will interest rates rise following the fall in unemployment?

So will interest rates rise? That’s the obvious question today after the unemployment rate dropped even faster than economists were expecting, from 7.4 per cent to 7.1 per cent.

It’s now hovering seductively (or alarmingly, depending on your borrowing status) close to the 7.0 per cent level which the Governor of the Bank of England set as a threshold at which he and the rest of the Monetary Policy Committee would consider putting interest rates up again.

If you are on a tracker mortgage, you can breathe easily for a bit longer. If you’re a saver, I’m afraid the returns on your savings will remain paltry for some time to come.

The minutes of the last MPC meeting were also released today and the committee makes clear that, even if the threshold is breached, inflation is low and “it is likely the headwinds to growth associated with the aftermath of the financial crisis would persist for some time yet …” so they see no "immediate need” to raise interest rates. And when the time does come, it “would be appropriate to [raise rates] only gradually.”

The Bank of England. Credit: Yui Mok/PA Wire

So the message is the same – the Bank is in no hurry to make borrowing more expensive. But the great experiment of forward guidance, of trying to give borrowers confidence that they weren’t going to get stung with higher rates for some time is over. We’re back to a guessing game because unemployment is no longer a guide to what the Bank will do.

Unemployment figures have shown significant improvement. Credit: ITV News

One remaining question is what the Bank does with forward guidance. Does it change the threshold, dropping it to 6.5 per cent? After the unpredictable way unemployment has behaved over the last few months, that might seem unwise. More likely is it focuses once more on inflation alone. We may find out more in a few weeks’ time when the Bank publishes its quarterly inflation report.

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