Pay data and spending plans strengthen hand of rate hawks

City economists are split over whether the Bank of England's Monetary Policy Committee will raise interest rates this week. However, the Government's spending plans and evidence of rising wage pressures will strengthen the hands of the hawks.

City economists are split over whether the Bank of England's Monetary Policy Committee will raise interest rates this week. However, the Government's spending plans and evidence of rising wage pressures will strengthen the hands of the hawks.

A poll of 33 economists found that 25 thought rates would stay at 6 per cent, although all agreed it was one of the hardest forecasts to make this year.

A report today by Incomes Data Services warns that rising inflation will fuel a sharp rise in the level of wage settlements this autumn. The incomes analysts said there would be a number of inflation-linked rises in long-term deals of between 3.8 and 4 per cent. This will be seen as a warning of rising pressures in the labour market.

IDS said a spike in settlements would contrast with last autumn, when inflation hit a 36-year low of 1.1 per cent and employers sealed wage deals as low as 1.6 per cent. "If the inflation rate is 3.3 to 3.5 per cent through early autumn we can anticipate this will be a key benchmark for January 2001 and... April 2001," IDS said.

Its analysis showed that nearly three-quarters of pay deals agreed in the three months to July were more than 3 per cent, compared with less than half the previous quarter.

Geoffrey Dicks, UK economist at Royal Bank of Scotland, agreed there was a risk of pay deals at 4 per cent, but added: "In a world of relatively stable inflation, there is less need for aggressive wage bargaining than in the high, and volatile, inflation era of the 1970s and 1980s."

The official data have recorded a sharp drop in the growth rate of average earnings, driven by a fall in bonuses. The headline rate for May was 4.6 per cent, down from 6 per cent in February.

Analysts believe this will be a crucial factor in the MPC's deliberations this week.