Average earnings surge ahead

By NICK GOODWAY FOR MAILONLINE
Updated:

 

An unexpected surge in Britain's average earnings last month sent shockwaves through financial markets today. Share prices gave up their best early gains and the pound soared by almost half a cent on speculation that the data could prompt the third rise in interest rates in as many months.

Figures published by the Government today showed that headline average earnings grew by 5.5% in the three months to January compared with 4.9% in the final three months of 1999. Most market forecasters had been looking for a rise of just 5%.

While Britain's jobless total remained at a 20-year low in January, average earnings surged ahead as the pace of the economy forced companies to continue to take on extra staff and pay them higher bonuses. The Treasury also pointed out that extra payments to people who had worked over the millennium holiday had added to the rise to 5.5%.

That is way above the Bank of England's comfort level of 4.5%, which the monetary policy committee believes is compatible with its underlying inflation target of 2.5%, and inevitably adds to the pressure on interest rates.

Michael Hulmes of Lehman Brothers said: 'We will need to see a substantial turnaround in the numbers next month, otherwise the Bank will be very concerned indeed.' Only last week the Bank put interest rates up by a quarter-point to 6%.

But Rob Hayward of BankAmerica was more sanguine. 'If you exclude the bonus element, the year-on-year rate is 4%, up a bit on November but not as dramatic as the headline figure would suggest.' Although pay settlements still remain around the 3% level, bonuses being paid, mainly to people in the City and those working in technology and internet companies, meant that service sector earnings rose by 5.7%. By contrast the rise in public sector earnings was just 3.9%.

The Office for National Statistics said the number of people out of work and claiming benefit in January fell to 1.158 million from 1.168 million in December. The proportion of the working-age population without jobs remained steady at 4% - the lowest since January 1980.

The pound rose half a cent on the news to $1.60 with the euro worth 61.35p. Gilts and short sterling fell sharply on the figures with the December contract now indicating that markets expect interest rates of 6.75% by the end of the year.

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