Britain's jobless rate dips, prompting more bets on earlier rate rises

Wed Sep 11, 2013 6:29am EDT
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By Olesya Dmitracova and William Schomberg

LONDON (Reuters) - Britain's unemployment rate dropped in July to its lowest since late last year, adding to speculation that the Bank of England may raise interest rates earlier than it has predicted.

The rate dipped to 7.7 percent in the three months ending in July from 7.8 percent previously, the Office for National Statistics said on Wednesday. That was its lowest since the September-November period in 2012.

The Bank of England has set the unemployment rates reaching 7 percent as a target in its decision about raising interest rates. It suggests this won't be before the third quarter of 2016, but markets are betting it will be before this.

As a result, Wednesday's release caused a jump in the pound to its strongest level against the dollar in seven months, while the difference between British and German government borrowing costs widened back to the highest level in three years. <GB/>

British Prime Minister David Cameron welcomed the fall in unemployment. Two days earlier, his finance minister, George Osborne, said the country's economy was turning a corner having struggled to recover from the financial crisis.

"It's another set of impressive figures," said Investec economist Victoria Clarke. "It suggests the jobs market is recovering much like the broader economy. It reinforces our view that unemployment will come down to 7 percent more quickly than the Bank of England expects."

Investors reckon joblessness will come down more quickly than the Bank does and have been pricing in the first rise in interest rates as soon as late 2014.

This risks a future confrontation between the Bank and the market.   Continued...

A woman passes notices for jobs in the window of a recruitment agency in London April 13, 2011. REUTERS/Luke MacGregor