Leading MPC rate dove joins hawks over wages

SUSHIL WADHWANI, a prominent interest rate dove on the Monetary Policy Committee (MPC), yesterday surprised the financial markets by turning into a hawk. Speaking at a conference, Mr Wadhwani signalled his concern with rising prices of services and higher real earnings growth.

Reports of his comments at a conference sent interest rate futures lower, with the market pencilling in a level of rates above 6.5 per cent by late next year. The MPC increased rates by a quarter point to 5.5 per cent earlier this month - a move Mr Wadhwani had voted for despite his earlier dovish stance.

He described the trend in services prices signalled by forward looking indicators such as rising price expectations in the British Chambers of Commerce quarterly survey as "quite worrying".

"Although goods prices are displaying signs of deflation and although utilities prices are depressed, inflation in services is still rising at a rather rapid rate and has been climbing in the past few months," he said.

Recent official figures showed services inflation had picked up to 3.9 per cent in October, the highest for almost six years. Goods price inflation fell to 0.4 per cent, the lowest since records began in 1988.

Mr Wadhwani also referred to potential pressures in the jobs market. "One worrying development in the last few months is that on virtually any measure of real earnings growth it has been going up."

The comments were unexpected, but did not convince all analysts to increase the odds on an interest rate rise.

"It is difficult to see any central bank moving in December because of the Y2K constraint, and there will be great uncertainties about the data in the early part of next year," said David Owen, an economist at Dresdner Kleinwort Benson. He predicted there would be a further small increase in March.

In a separate speech yesterday Eddie George, Governor of the Bank of England, said the MPC had been unable to shelter the sectors or regions most exposed to the strong pound for fear of destabilising the whole economy. "We have, of course, taken them into account in reaching our monetary policy decisions," he said.

The Governor said the UK had experienced the longest sustained period of low inflation since the Second World War, combined with the longest period of sustained growth since GDP figures began in 1955, record employment levels and the lowest unemployment for nearly 20 years.