Pay settlements may trigger an increase in interest rates

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The Independent Online
THE ROBUST strength of the economy threatens to fuel claims for inflation-busting pay deals that could drive up inflation and trigger hikes in interest rates.

The warning, from wage experts Incomes Data Services, (IDS) will add to speculation the Bank of England will raise rates again this week.

Pay settlements in Britain remain well ahead of the cost of living despite having been subdued in recent months. IDS warned that despite continued modest awards in the coming period, robust economic growth was likely to fuel higher earnings in future thanks to bigger bonuses and more overtime.

"The irony here is that it is the success of Gordon Brown's stewardship of the economy which has brought about the earnings growth that he is now criticising," it said.

More than half the 130 pay settlements in the three months to September were between 2.5 and 3.5 per cent. About a quarter were above this range and a fifth below.

IDS said the number of settlements below 2.5 per cent had steadily increased throughout the year, while the share at 4 per cent or above had remained fairly constant.

Some of the higher awards in the latest period included an increase of 5 per cent in the demolition industry, 4.9 per cent for professional staff at instrument manufacturers Perkins Elmer and average rises of 4.3 per cent for civil servants at the Department for Education and Employment. Average earnings, which include overtime and bonuses, were running at 4.9 per cent year on year in the three months to August.

Meanwhile, fierce high street competition has pushed headline inflation down to just 1.1 per cent, its lowest rate since 1963, while underlying inflation is 2.1 per cent.

The pay warning came as the Bank of England's monetary policy committee prepares to decide whether rates need to be raised ahead to dampen inflationary pressures.

Most economists expect a 0.25 per cent hike to 5.5 per cent when they announce their decision on Thursday. Dharshini David, of HSBC, said: "With unemployment falling by an average of 20,000 a month, these figures may be interpreted as a sign that the labour market is now excessively tight."

The Chancellor has urged employees not to seek inflationary pay rises.

Away from the labour market the main issues will be the surge in house prices. Recent data has been mixed, with mortgage lending hitting an all- time peak in September. However the Royal Chartered Institution of Surveyors reported a fall in the number of members reporting price rises while the Nationwide building society said house price inflation fell for the second successive month.

Since the MPC's last meeting, however, it emerged that the economy grew 0.9 per cent in the third quarter - much faster than expected - while the manufacturing sector climbed further out of recession.