Hawk' raises rates hopes

Fears that the Bank of England could raise interest rates eased yesterday when an important new member of Threadneedle Street's rate setting committee said there were few signs of wage inflation, even though unemployment has fallen to a 20-year low.

Professor Steve Nickell, a labour market expert, told members of the Treasury select committee that he would have to see evidence of rising wage inflation before voting for higher rates.

"At the moment I would not see the necessity on this particular score to tighten monetary policy," Prof Nickell added.

Some City analysts had expected Prof Nickell to side with the hawks on the Bank's monetary policy committee because of his view that there is an equilibrium rate of unemployment - and if the jobless rate falls below this level, it puts pressures on prices.

However, Prof Nickell said the equilibrium rate had fallen in recent years and that in any event, it was only a guide to setting policy. "Precisely where unemployment is relative to the equilibrium rate today is not known," he said in his written evidence to the committee.

"It is almost certainly fairly close but to judge precisely where it is can only be done by looking closely at the evidence for excess demand in the labour market."

Asked how he would judge this, Prof Nickell said: "I'd watch the wages; that seems to me to be the key to this."

The MPC has been closely watching the level of average earnings, running at an annual rate of 5.8%, well above the 4.5% rate which the Bank estimates is consistent with keeping inflation in check.

Prof Nickell said the level of pay settlements which have remained steady at around 3% was a better guide than the average earnings index which has been dogged by problems of reliability.

The Bank's key rate-setting committee is widely expected to leave rates on hold next month because of the strength of sterling. Prof Nickell and his fellow new entrant to the MPC, Chris Allsopp, agreed that sterling's level was well above any long run estimate of its equilibrium rate. However, Mr Allsopp said there was little policymakers could do to massage sterling down. "I would be particularly worried about intervening at the moment, as it seems to me that probably the main problem is a dollar-euro problem, with sterling caught on one side," he said.

Sterling has slumped against the dollar in recent weeks after holding steady at around $1.60. It finished yesterday at $1.49, slightly up on Friday's low point of $1.47. "Sterling has had a little bit of a bounce today, but it still looks vulnerable," said David Coleman, chief economist at CIBC World Markets in London.