Bank of England holds interest rates until unemployment falls below 7%

Today Mark Carney announced that the bank of England will not change the interest rate unless unemployment levels drop below 7% or inflation gets way out of control. So I decided to do a bit of digging and look at the historical rate of unemployment to see just when it might fall back below 7%. I found a great section on Google that generates a chart of unemployment rates dating back to 1983 so 30 years of data. If you want to take a look for yourself here’s the link Historical unemployment chart or you can just take a look at the chart I’ve included below.

Unemployment Rate UK

By my calculations the unemployment rate has been below 7% for about 12 of the last 30 years however most of this was in the boom years of the late 90′s to 2008. Although unemployment seems to have evened out for the last few years I don’t think we’re anywhere near out of the woods yet so it looks like we’ll be enjoying the 0.5% base rate for a few years to come yet.

I say enjoying, it’s great news for borrowers as it should mean lower rates for the foreseeable future however it’s not so great for savers as the rate of return on savings will remain low until the rate starts to rise. Personally I’m happy with the news as the mortgage that I am currently listed on tracks the bank of England base rate and so if it doesn’t creep up then our mortgage payments will stay lower for longer. Since the mortgage is interest only it also means that we can actually get a better rate on our savings than we are paying in interest in the mortgage so any extra money that we make from rent can sit in a savings account rather than pay down the mortgage as it will generate more interest than we would save.

So in summary I don’t expect that unemployment is going to fall drastically any time soon and I would certainly think it will be another couple of years before we even get close. The good thing is it gives a much better gauge of when interest rates might rise as we will have a warning sign as unemployment reaches 7% rather than just waiting to see what the board of the bank of England decides each month at their meetings.

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