Wage inflation dampens hopes of further rate cuts
Thursday 22 April 1999
The Office for National Statistics announced details of sharp upward revisions to its controversial average earnings index for January, while the February earnings data were substantially stronger than the market had anticipated.
Larger-than-expected Christmas bonuses helped take the headline earnings growth rate to 4.5 per cent in January, the ONS said, not 4.3 per cent as previously thought. In February, the headline growth rate was 4.6 per cent, 0.5 points higher than expected and marginally above the 4.5 per cent threshold the Bank of England considers compatible with the inflation target.
"The strength of the earnings data clearly works against further rate cuts," said Ken Wattret at Paribas.
The ONS - which came under fire in the autumn after issuing a series of revisions to the sensitive average earnings figures - said the changes were "exceptional" and primarily caused by firms filing wage information after the ONS deadline. Unlike the contentious autumn revisions, yesterday's figures were not the result of changes in ONS methodology, officials said.
The disappointing earnings figures were driven by a surge in service sector pay, analysts said. The headline rate of service sector earnings growth in February jumped 0.3 points to 4.8 per cent. Following the release of the data, sterling weakened against the euro to close at 66.03 pence. Elsewhere in the foreign exchange markets, the euro sunk to a new low against the dollar.
The stir caused by the earnings data overshadowed the minutes of the last Monetary Policy Committee meeting, also published yesterday. The minutes showed that, contrary to speculation, the nine MPC members voted unanimously for a cut in rates earlier this month. The activist Dutch academic Willem Buiter voted for a 0.5 point cut, while all other MPC members plumped for 0.25 points.
The strength of sterling, the fragility of confidence and market expectations were all cited as justification for the cut. The committee also pointed to lower-than-expected earnings growth - members were unaware of yesterday's earnings revisions when they met earlier this month.
Separate figures released by the ONS showed a smaller-than-expected rise in UK unemployment in March, with the national claimant count up by just 2,000.
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