Clare Lombardelli, the Bank of England's deputy governor for monetary policy, said young people in Britain are bearing the brunt of a "low-gear economy" as employers hold back from hiring amid the fallout from the Middle East war. She said the conflict, which has triggered a surge in energy prices and clouded the economic outlook, was contributing to the rise in youth unemployment, and that the cost is falling on young people, with a rapid rise in the number struggling to find work.

A 'low-gear economy' with low hires and few redundancies

In an interview with the Guardian, Lombardelli said UK employers were trying to navigate the complex geopolitical backdrop by holding on to existing staff and freezing new recruitment. The result, she said, is a labour market with a real fall-off in hiring but few redundancies - a low hire, low fire dynamic.

Employers are delaying hiring because they want to see whether the uncertainty will resolve, she said, noting that nobody expected the conflict to be nine months old. And when firms stop hiring, the damage falls on newcomers, she warned: "If firms are not hiring, obviously, by definition, that means people that are new to the labour market are hurt by that."

First-job sectors hit and the Neet numbers

The stagnation is concentrated where young people usually start out. Lombardelli, a former Treasury and OECD economist, said the jobs market is hitting the sectors that offer young people their first job, pointing in particular to hospitality and retail, where vacancies have really fallen off.

• •Overall UK unemployment has risen this year to 4.7%, driven by costs from the Iran war, higher taxes and weaker consumer demand amid the cost of living crisis
• •Youth unemployment has risen at a sharper rate, to the highest levels outside the Covid pandemic since 2015
• •The number of young people not in education, employment or training (Neet) has risen to almost a million, making the youth jobs crisis a growing government priority

Bank surveys of employers, she added, suggest a sense that hiring a young person is a higher risk than it used to be.

A 'live' interest rate decision next month

Lombardelli warned that the Bank is preparing for a "live" decision on interest rates next month, after raising borrowing costs the previous week for the first time in three years. She joined the majority of the monetary policy committee in voting to lift the base rate from 3.75% to 4%, and said a further quarter-point rise could be warranted from as early as the next policy meeting in December.

She said that pricing depends on the conflict, energy prices and the wider data, adding: "But I wouldn't rule it out. Equally, I don't have enough information just yet." She was among MPC members who, alongside governor Andrew Bailey, raised the prospect of another rate rise soon, with a resolution to the Iran conflict the key factor. She is expected to outline concerns over a slowdown in labour market dynamism in a speech in London on Tuesday.

Conflict, energy prices and the inflation puzzle

Oil prices have fallen sharply to below $100 a barrel after the Democrats' victories in the US Congress, which some investors read as constraining Donald Trump's ability to prolong the Iran conflict. Trump said at the weekend that he was highly unlikely to order fresh attacks on Iran as long as talks to end the conflict progressed.

Threadneedle Street is watching the jobs market closely over concerns that high inflation could become entrenched if workers with enough bargaining power push for higher wages, prompting firms to raise prices. A weaker labour market might ordinarily diminish that risk, but Lombardelli said higher unemployment would not necessarily bear down on inflationary pressures. Employers, she said, are holding on to the staff they need and hiring only for harder-to-fill positions: "You can have higher unemployment without it exerting a downward pressure on inflation. So that's obviously a problem."

Government awaits Milburn report

Her comments came as Andy Burnham's government awaited the findings of a report into young people and work by the former Labour cabinet minister Alan Milburn, expected to be published the following week.