Jobless fall increases likelihood of interest rate rise

City investors were betting on an early rise in interest rates last night after hawkish comments from the Bank of England's latest rate-setting meeting coincided with news that last month unemployment dropped to its lowest level for more than 25 years.

After the minutes of September's gathering of the Bank's monetary policy committee showed some members believed the economy was recovering more strongly than expected, the markets shortened the odds on a rate rise, putting an 85% probability on a half-point increase by the end of the year. Upbeat signals from the minutes were amplified by an unexpectedly upbeat labour market report, which showed the unemployment claimant count fell by 6,900 last month to 930,800 - the lowest level since September 1975.

On the wider International Labour Organisation measure, the unemployment rate was flat in the three months to July, at 5.1%, according to the office for national statistics, while average earnings growth picked up to 3.4%, from 3.1% a month earlier.

The MPC voted unanimously to leave rates on hold at their 48-year low of 3.5%. However, the discussion pointed to "clear evidence of a revival in the housing market", and "a more buoyant near-term outlook for consumption growth than expected a month or two ago".

If the slowdown in consumer spending registered earlier this year was temporary, some members argued that "the stimulus provided to domestic demand by the current level of interest rates might prove to be more than was needed".

Analysts said the tone of the discussion showed that the next move in interest rates could be up. "Should the Bank be faced by continued strong consumption and debt growth, along with improving global and domestic economic growth, then we may well see the rate cuts earlier this year being reversed," said George Buckley of Deutsche Bank.

Concerns about high levels of household debt, which were voiced in a recent speech by Bank-appointed MPC member Paul Tucker, were also repeated at the meeting.

"The continued rapid growth of household debt suggested to some members that the pace of consumption growth might be based on over-optimistic expectations of future income growth or real interest rates," the minutes said. However, independent MPC member Steve Nickell dismissed that argument in a speech on Tuesday, insisting that putting the brakes on borrowing was not the job of the MPC.