Fall in pay growth keeps lid on rates

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A SHARP and unexpected fall in earnings growth has lessened the risks of another rate rise, economists said yesterday.

However, unemployment fell sharply in July, prompting some in the City to speculate that the rate of earnings growth could pick up again later in the year.

Kevin Darlington at ABN Amro said: "Pay growth remains well above the Bank's 4.5 per cent tolerance threshold and, with unemployment continuing to fall, it remains premature to talk of rate cuts."

Sterling fell by more than 1.5 pfennigs to close at DM2.8914, largely on the earnings news, which also helped sentiment on the stock market, closing up 29.4 points at 5462.2 after yesterday's 155-point fall.

Stephen Byers, Chief Secretary to the Treasury, welcomed the figures which he described as "good news on the economy, showing more jobs, falling unemployment and a welcome reduction in earnings growth."

Headline earnings growth fell to 5 per cent in May from 5.4 per cent in April, according to the Office for National Statistics (ONS). The pick-up in the earnings growth earlier this year was one of the main reasons why the Bank of England's Monetary Policy Committee (MPC) hiked rates in June.

Mervyn King, Deputy Governor of the Bank and one of the more hawkish MPC members, welcomed the drop in the rate of earnings growth. However, he pointed out some "distinct oddities" in the figures that needed further analysis, such as the sharp fall in private sector earnings growth.

The claimant count - one measure of unemployment - fell sharply by 26,000 in July, taking the unemployment total to 1.335m. The ONS also revised downward its estimate of the June claimant count, saying this fell by 5,800. Previously, the ONS said it rose by 700.

Some economists interpreted the fall in the jobless numbers as a cause for concern, saying that unemployment needed to rise to keep the lid on earnings growth.