Rise in earnings strengthens case for rate increase

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The Independent Online

The odds on a further rise in interest rates narrowed yesterday after new figures showed headline earnings growth accelerating to its fastest since July 1992.

The minutes of the last Monetary Policy Committee (MPC) meeting, also released yesterday, showed a six-three split in favour of unchanged rates at the last meeting. But they said: "For many members, the choice was finely balanced."

The pound leapt higher, its index jumping from 109.3 to 110.2, close to its recent 14-year high of 110.6.

The minutes noted that although figures for earnings were volatile, pay growth would start from a higher point in May's quarterly Bank of England Inflation Report than expected at the time of the February forecast.

The discussion amongst the nine members concluded the impact of the Budget on growth and inflation was unlikely to be large.

However, the mobile telephone licence auction could send the pound higher if foreign bidders had to buy large amounts of sterling to pay for a licence, the minutes said.

A separate report yesterday from the respected National Institute for Economic and Social Research predicted the expansionary Budget could also boost the pound by up to 3.5 per cent. It said the currency markets would expect long-term UK interest rates to be higher as a result of increased public expenditure.

Business organisations and unions repeated their pleas for the committee members to sit on their hands at next month's meeting. "There is no justification for putting up interest rates," said Kate Barker, chief economist at the Confederation of British Industry.

However, the latest official data gave the three hawks - Willem Buiter, Mervyn King and John Vickers - some fresh ammunition.

Unemployment declined on both measures. The claimant count fell by 7,700 in March to 1,148,800, leaving the unemployment rate at its 20 year low of 4 per cent. The preferred survey-based measure fell by 25,000 in the latest three months, December-February.

Employment rose overall, despite continuing job losses in manufacturing. Most regions saw an increase in job numbers in the latest quarter, the exceptions being the West Midlands, South-west and Wales.

A separate survey from the Consumers' Association yesterday showed optimism had fallen nationwide but was lowest in the Midlands, North and Scotland.

Of most concern to the MPC will be the rise in underlying average earnings growth to 6 per cent in February from 5.9 per cent the previous month.

The actual year-on-year rate dropped from 6.5 per cent to 5.5 per cent as millennium bonuses washed out. But Paul Mortimer-Lee, chief economist at Paribas, said:

"This is still uncomfortably high. The MPC will be concerned about pay pushing services prices higher."

Richard Iley at ABN-Armo, said: "Expect rates to go up in May regardless of the strong pound."

The minutes showed the committee had a further discussion about the possibility of intervention in the currency markets to bring down the exchange rate, reaching no agreement. Analysts in those markets are sceptical about such direct action. Mr Mortimer-Lee said: "If the European Central Bank doesn't think intervention will work to strengthen euro, why should the Bank of England know any better?"