Pay rise trend erodes hopes of rate cut

Pay deals have risen significantly at the start of the new year, according to a survey published today - casting doubt on the expected outcome of this week's meeting of the Bank of England's monetary policy committee.

Most City analysts expect interest rates to be cut by 25 basis points to 5.75% on Thursday, but the new pay figures from Incomes Data Services (IDS), showing deals clustered between 3.5% and 5%, suggest the MPC may leave them on hold for the 12th month in a row to prevent higher inflation.

IDS said it had recorded 46 increases so far this year, covering 188,000 employees. "Many are inflation-linked rises paid under long-term deals, typically giving increases in the 3.2% to 3.7% range. However, the newly negotiated January deals are generally a little higher - those monitored so far are mostly between 3.5% and 5%."

IDS blamed the pick-up in pay deals in January, the crucial month for private sector settlements, on last year's rise in the headline rate of inflation. Although it fell in December, November's inflation rate of 3.2% was a strong influence on January pay budgets. The increase in pay set tlements is likely to reinforce fears among the hawks on the MPC, notably labour market expert Stephen Nickell, that low unemployment could still create a wage/price spiral, although other committee members are more concerned about the deflationary impact of weakening global growth.

January's vote was the closest for months, with four of the nine members voting for a rate cut. Since then, underlying inflation, excluding mortgage interest payments, has fallen further below target and GDP growth in the fourth quarter of last year slowed to its weakest rate for two years.

However, the GDP figures were distorted by an erratic fall in energy output, and most short-term indicators suggest business and consumer activity remains strong despite the sharp slowdown in the US.

A survey published yesterday suggested business leaders needed a rate cut. The BDO Business Trends report found that, although the economy remained relatively healthy, business confidence was continuing to deteriorate.

Peter Hemington, a partner at BDO Stoy Hayward, said: "The report shows that UK business is in danger of talking itself into a slowdown, even though the economic outlook remains reasonably positive."