Jobs gloom may be rates boon

Prospects of further cuts to interest rates rose yesterday after news of climbing unemployment and hints from the Bank of England that it may sanction cheaper borrowing.

The number of people out of work and claiming benefit increased by 4,300 in February to 1,311,000, as the slowdown in the economy took its toll on the labour market, according to the Office for National Statistics. The proportion of workforce unemployed stood unchanged at 4.6 per cent.

The size of the increase surprised City economists, although most have been expecting the labour market to turn down for some time.

With earnings growth also moderating, analysts said there was room for the Bank to resume the downward movement in interest rates which has seen the cost of borrowing drop from its peak of 7.5 per cent to 5.5 per cent in six months.

'The prospect of a further slowdown in earnings growth and higher unemployment ahead should help interest rates to ease modestly lower,' said Jonathan Loynes of HSBC. 'We continue to look for a further fall to 5 per cent in the summer.'

At its March meeting, when the monetary policy committee voted eight to one to keep rates on hold, the committee stressed four developments over the previous month: the publication of new figures for earnings, the rise in the pound, the weaker-than-expected growth figures, and a strengthening in business and consumer surveys.

'On balance, these four factors suggested slightly lower prospective inflation than thought at the time of February Inflation Report,' according to the minutes, which were published yesterday.

The report of the meeting on March 2 and 3 revealed the nine-strong committee debated several base-rate options before coming down in favour of no change. The one dissenter, Professor Willem Buiter, favoured an immediate cut of 0.4 of a percentage point, with the rest of the MPC preferring to wait and see how the five previous cuts were affecting the economy.

The TUC called on the Bank to resume cutting rates at its meeting next month. 'Today's increase in unemployment shows the economy has reached a critical turning point,' said TUC general secretary, John Monks.

Earnings growth - one of the main fears of the Bank - fell 0.2 of a point at the end of 1998, according to the ONS. Yearly growth in average earnings stood at 4.3 per cent in the three months to December, compared with 4.5 per cent to November.

The economic slowdown has hit the manufacturing sector much harder than service industries, where employment levels are still rising although at a slower rate. Manufacturing firms have shed 118,000 jobs over the past year, while those in the service sector have provided 388,000 new jobs over the same period.

'Manufacturing is in recession, but we're now seeing a slowdown in the service industries which has led companies to cut their employment needs,' said Neil Parker, UK economist at Royal Bank of Scotland.

The ONS said that, with 27.3 million people in work over the November-January period, an increase of 119,000 on the previous quarter, employment levels were the highest recorded. The employment rate stands at 73.9 per cent of the working-age population, the highest level since spring 1990. But most new jobs are part-time. In the middle of last year most new jobs were full-time.