LONDON, Jan 13 (Reuters) - Britain’s unemployment rate may well stay close to its current 11-year low this year rather than pick up markedly as the central bank forecast in November, one of the Bank of England’s policymakers said on Friday.
Michael Saunders said inflation was still likely to overshoot the BoE’s 2 percent target this year, but this reflected sterling’s weakness since June’s Brexit vote.
“Economic growth has recently been stronger than expected,” Saunders said in a speech to be delivered to the Resolution Foundation, a think tank focused on low pay.
“Rather than the rise in unemployment forecast in the November Inflation Report, it seems quite possible to me that the jobless rate will stay below 5 percent this year,” Saunders, an independent external member of the rate-setting Monetary Policy Committee, added.
Britain’s unemployment rate reached an 11-year low of 4.8 percent in the third quarter of 2016, the lowest since 2005. In November, the BoE forecast this would rise to 5.4 percent by the end of this year, as overall economic growth slowed to 1.4 percent from around 2 percent last year.
The central bank cut interest rates to a record low of 0.25 percent in August due to fears that Britain’s economy was slowing sharply after June’s vote to leave the European Union. But as signs grew that the economy was holding up, the BoE said in November it no longer intended to cut rates further.
Saunders said he believed the equilibrium jobless rate - or the rate at which it exerts no upward pressure on inflation - has fallen below 5 percent but he said was unsure by how much.
Any economic weakness may well translate into less secure jobs, shorter hours, and more people dropping out of the workforce, rather than an outright rise in unemployment, he said.
Below-forecast unemployment did not point to extra inflation pressures for Britain, as wages were unlikely to grow strongly, he added.
However, Saunders said economists had been misled in the past by overestimating the amount of slack in the economy, only to be surprised by a later surge in inflation.
“If pay and other labour market guides give clear warning signs in coming months ... this would have obvious implications for monetary policy, unless downside risks to economic growth rise significantly,” he said. (Reporting by David Milliken; Editing by William Schomberg)