City bonuses add to pressure for rate rise

Fat bonus cheques for City workers last Christmas have pushed growth in average earnings to the highest levels since the terrorist attacks of September 11, increasing the likelihood of an interest rate rise before the summer.

Earnings growth surged during January, the Office for National Statistics reported, as unemployment took another tumble.

The claimant count fell by 6,600 in Febuary to 885,000, its lowest level since September 1975. On the wider measure, which uses the labour force survey to count all those looking for work, unemployment fell by 33,000 in the three months to February to 1.436m, just short of the record low seen in the spring of 2001.

Signs that the labour market is starting to heat up will be scrutinised by the Bank of England's monetary policy committee, which is mulling over further rate rises.

Discussion at the committee's meeting this month was dominated by the need for higher borrowing costs, according to the minutes published yesterday. Although the committee voted 9-0 in favour of keeping rates on hold at 4%, several members expressed concern about the strength of household borrowing and the resurgence in house prices.

"Households' financial position could become unsustainable and so increase the probability of an eventual abrupt adjustment process," the MPC minutes noted.

The Bank had been expecting a rebalancing of the economy in the first half of this year as household spending slowed. But, the minutes noted, retail sales growth has been unexpectedly strong since Christmas as the rebound in the housing market has given consumers a boost.

At least one member raised the possibility of an immediate rise to send a signal to consumers. Speculation in the City about the person responsible for the hawkish remarks singled out deputy governor Sir Andrew Large, who voted for a rate rise at the previous five meetings.

"Despite the 9-0 vote to keep rates steady, the minutes clearly point to more rate rises to come," said Howard Archer, an economist at Global Insight. "The MPC could yet move in April if consumers continue to borrow and spend strongly."

The surge in average earnings growth to 4.4% in the three months to January from 3.5% in the three months to December was the highest since September 2001, and pushed gilt and interest rate futures down on the perception that it made further interest rate rises more likely.

But economists pointed out that the growth rate excluding bonuses hardly budged, rising to 3.6% in the three months to January, up from 3.5% in the three months to December.