George warns on 'inflationary' pay deals

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The Independent Online

Economics Correspondent

Eddie George, Governor of the Bank of England, yesterday said a pick- up in pay settlements would pose a threat to the prospect of future interest rate cuts. His warning came on the day that Vauxhall car workers rejected a pay offer of 4.5 per cent.

It also came shortly before the Cabinet considers the pay review bodies' recommendations on awards for 1.4 million public-sector workers. The bodies, covering teachers, doctors, dentists and nurses, the armed forces and ''top salaries'' for judges and mandarins, are believed to have been recommended pay rises above the 3.1 per cent inflation rate.

Mr George said yesterday that there were potentially negative aspects of the outlook for inflation, alongside the encouraging features. He highlighted pay deals and rapid growth of the money supply. In an interview on BBC radio, he said: ''We have recently seen a few settlements - settlements which other people pay attention to - which may be justified in themselves but can be taken as a kind of lead for others where they wouldn't be justified in the same way.''

He said the low level of pay rises so far, running at about 3 per cent, had been encouraging. But the motor companies have traditionally been seen as pace-setters on wages. Ford unions are preparing a strike ballot in support of a 10 per cent claim.

Vauxhall car workers yesterday rejected a three-year pay offer. Workers at its Luton and Ellesmere Port plants voted against accepting an offer of a 4.5 per cent pay rise now, followed by an increase in line with inflation over the next two years, as well as a one-hour cut in the 39-hour week.

Mr George said the Bank of England would monitor the situation closely, with January a particularly important month for settlements. Although economic prospects were ''extraordinarily favourable'', he said, there was certainly a possibility that the recent quarter point cut in rates would have to be reversed within six months. Interest rates could come down if inflation prospects improved.

The Chancellor has said there will be no extra government money to fund higher public sector pay awards.