Pay figures to fuel fears of rate rises

THE REPORT on wage settlements due this week is likely to justify the Bank of England's recent decision to put up interest rates, and even raise the odds it will increase them again.

Economists expect the Office for National Statistics report on wages and salaries to show that pay soared in March by an annual 5.1 per cent, even faster than February's 4.9 per cent, fuelling concern on the central bank's Monetary Policy Committee (MPC). The committee cited rising pay as a key reason for its last decision to raise rates.

"The markets are bracing themselves for an alarming headline figure on earnings which is going to fuel fears of another rate hike around the corner," said Ian Amstad, senior economist at Bankers Trust. The improved chance of higher rates underpinned the pound, keeping it at Dm2.9548 on Friday.

The Bank is concerned that rising pay could force companies to raise prices. Its policy makers say 4.5 per cent a year is the most wages can grow without igniting inflation. It is particularly worried about pay levels in private industry, which rose an annual 5.6 per cent in February, compared with just 2.6 per cent in the public sector.

The outlook for interest rates was muddied further last week when minutes showed the MPC voted in May by six to two to keep rates on hold. Speculation in financial markets last week was that the panel performed a U-turn in June, voting almost unanimously to raise rates. "I was hoping the committee would look further towards the horizon when steering the tiller, rather than being knocked around by every wave that comes along," said Jonathan Loynes, economist at HSBC Markets. "The fact that they can change their minds so dramatically in one month is a worrying development and not good for the market's nerves."

Bonuses in financial services and some sectors of manufacturing have inflated average earnings. The ONS estimates that one-off payments added 0.7 per cent to the pay bill in February and 1.4 per cent in March.

Wages probably rose again in April when annual rises in basic pay came through. Economists said the dilemma facing the Bank is that bonus payments may be here to stay. Workers in computing and construction are in short supply, so companies have to offer extra payments.

"In tight labour markets bonuses are a permanent feature, and that's why we have a real problem," Mr Amstad said. "I'm predicting one more rise in rates to 7.75 per cent, but the risks to that forecast are on the upside."

The Chancellor, Gordon Brown, also put pressure on the Bank to increase rates when he raised the limit on spending growth to 2.75 per cent a year for the next three years.

Copyright: IOS & Bloomberg