Eddie George, Governor of the Bank of England, is firmly expected to advise a quarter-point rise in base rates to 6.25 per cent at his next meeting with the Chancellor of the Exchequer.
The economic news took sterling within a whisker of DM2.60 last night, up more than a pfennig during the day.
Adam Cole, UK economist at James Capel, said: "These data were the final nail in the coffin for base rates in January."
The futures markets are betting that base rates will be 7.25 per cent by the end of next year as the economy gathers pace.
Kenneth Clarke said yesterday that nothing made a change in base rates inevitable, but he repeated his commitment to keeping inflation under control. "Low inflation is one of the ingredients that is making the economy so healthy," he said.
The fall of 95,800 to 1.9 million in the number of people claiming unemployment benefit, the biggest monthly drop since late 1962, was swollen by the introduction of the Job Seekers Allowance and administrative changes.
Assessing new claims is taking longer, and means testing of claims now starts after six months rather than a year. These reduced the headline jobless figure by 25,000. New restrictions on signing on by post and the fraud hotline also helped reduce the total.
Yet even taking these into account, last month's decline in unemployment was the biggest for a quarter-century. Official statisticians said that the trend monthly decline was at least 15,000-20,000.
The number of claimants fell in all regions of the country. The overall unemployment rate dropped to 6.9 per cent, with the rate in Northern Ireland falling below 10 per cent for the first time in more than 16 years.
John Monks, general secretary of the TUC, welcomed the news but said: "Let's not forget that when this Government took office in 1979 unemployment was 1.3 million."
There was nevertheless supporting evidence of a real improvement in the jobs market in new figures for the workforce in employment yesterday. There were 165,000 new jobs in the third quarter, and 264,000 in the year to September. It was the biggest quarterly increase since March 1989, although unusually driven by a big increase in the number of self-employed.
The separate, and less timely, figures from the detailed Labour Force Survey show that in the year to August there was a rise of 210,000 in employment, with part-time jobs once more dominating. Male full-time employment fell but was more than offset by a big rise in part-time work to give an increase of 91,000. Women gained 55,000 full-time and about 66,000 part-time jobs.
The stock of vacancies in Job Centres reached the highest level since the series began in 1980. The ratio of vacancies to unemployment, an indicator of how tight the labour market is, has returned to the levels of the late Eighties.
However, there was little sign in the figures that the rapid decline in unemployment is putting upward pressure on wages. Underlying average earnings growth remained at 4 per cent in October, the latest figure.
Leo Doyle, an economist at Kleinwort Benson, said: "There are enough warning signals for Eddie George to be worried, but we have not got a fully fledged boom here." He said greater flexibility in the labour market meant the economy could be stronger for longer without stoking inflation.
On the other hand, Michael Saunders at Salomon Brothers said: "Base rates are likely to have to rise fairly soon to stop the pace of growth from becoming so high it creates capacity strains." The picture of rapid economic growth was consistent, he said.
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