Britain’s unemployment rate is likely to fall slowly to reach 7.5 percent by late next year, a leading business lobby said, chiming with a Bank of England prediction that signaled record-low interest rates for another three years.
In its quarterly economic update yesterday, the Confederation of British Industry (CBI) said that the central bank’s pledge to keep borrowing costs at 0.5 percent as long as the unemployment rate exceeded 7 percent should ease credit conditions, and reassure businesses and consumers.
New Bank of England Governor Mark Carney will welcome this vote of confidence in his forward guidance policy, which includes several get-out clauses and has so far resulted in higher short-term market interest rates — the basis of credit costs in the economy.
Investors are now betting on the first increase in the main central bank interest rate in 2015, whereas rate-setters expect unemployment to hold above the 7 percent level until at least late 2016.
The CBI reckons that, as the economy recovers, firms will make greater use of their existing workers rather than go on hiring sprees.
“Our forecast is for the unemployment rate to fall back only gradually, as hours worked increase and productivity begins to recover. Our central assumption is that interest rates will remain on hold beyond 2014,” it said.
The lobby group sees the jobless rate easing from the current 7.8 percent only in the first quarter of next year, reaching 7.5 percent by the end of that year in line with the mean forecast by the Bank of England published on Aug. 7.
The CBI, whose former chief economist Ian McCafferty now sits on the bank’s rate-setting committee, also turned more upbeat about Britain’s prospects, encouraged by growing signs of vigor in the economy.
It expects GDP to rise by 1.2 percent this year compared with its May forecast of 1 percent, and by 2.3 percent next year, up from the 2 percent predicted a few months ago.