UK unemployment rates are now tied to the Bank of England governor Mark Carney's forward guidance. Rates will drop when jobless rates drop to below 7% (Photo: Reuters)
UK unemployment rates are now tied to the Bank of England governor Mark Carney\'s forward guidance. Rates will drop when jobless rates drop to below 7% (Photo: Reuters)

Britain's jobless rate is likely to drop to the same levels as predicted by the Bank of England to 7.5% by the end of 2014, says an influential business lobby group.

According to the Confederation of British Industry's (CBI) quarterly economic update, the unemployment rate will fall in line with the central bank's forecasts which supports the idea that interest rates will remain at a record low for three more years.

"Our forecast is for the unemployment rate to fall back only gradually, as hours worked increase and productivity begins to recover," said the CBI in a statement.

"Our central assumption is that interest rates will remain on hold beyond 2014."

Interest Rates and Jobless Rate

When BoE governor Mark Carney unveiled his forward guidance on the path of monetary policy, at the launch of the central bank's quarterly Inflation Report, he said the base rate would be held at 0.5% until the UK unemployment rate falls below 7%.

However, this forward guidance includes several get-out clauses.

Firstly, that the MPC thinks it is more likely, than not, that inflation in the 18-24 months ahead will be at least 0.5% higher than the government's 2% target.

Secondly, that medium-term inflation expectations are no longer well anchored.

And thirdly, that the BoE's Financial Policy Committee judged the stance of monetary policy was a significant threat to the UK's financial stability.

Unemployment Levels

The Office of National Statistics labour market data also showed in August that the employment rate lifted 0.1% in the three months to June, to 71.5%. The unemployment rate was unchanged on the quarter at 7.8%.

However, long-term unemployment crept up again in the three months to June but the number of Job Seeker's Allowance claimants has since dropped.

Youth unemployment rose to 973,000 in the second quarter, up by 15,000 on the three months to March.

The rate-setters expect the overall jobless rate to hold above the 7% level until at least until the end of 2016. However, market participants are eyeing the first rise in the main central bank interest rate in 2015.