Rate rise likely as employment hits record high

One of the strongest labour market surveys published for several years reported record employment levels and strong growth in pay packets, increasing the pressure on the Bank of England to put up interest rates.

Employment hit a new record of 28.33m and earnings rose by almost 5% year-on-year for the three months ending in February - the fastest growth since August 2001, the Office of National Statistics reported. The Bank of England has said it is comfortable with wage inflation of 4.5% or below, but this most recent figure broke that target, increasing by 4.9%.

If increases in workers' incomes translate into inflationary pressure, the Bank of England will be expected to increase rates further to stay within the inflation targets.

City analysts said the increase in earnings inflation made pressures to increase interest rates by of a quarter of a percentage point on May 6 even more compelling. "All in all, the labour market is providing a bullish barometer of the economic situation and supports the notion that the current interest rate is too low," said Ciaran Barr, an economist at Deutsche Bank.

For the first time since September 2002, private sector pay packets increased more quickly than wages in the public sector.

Pay packets in the service sector increased by 5.2% year-on-year for the three months ending in February, the highest seen since June 2001. And private sector services earnings grew even faster, at 5.5%, the highest since March 2000.

Almost all the employment data showed that the labour market had tightened even further. The number of people claiming unemployment benefit was at its lowest for almost 30 years.

Unemployment fell to a new low of 4.8%, job vacancies edged up and the number of hours worked also increased over the period.

Bonuses have been driving recent pay increases, but there is now evidence that underlying wages are growing. Excluding bonuses, earnings rose by some 3.8%.

A difference in the timing of City bonus payments has made comparisons with last year difficult, but this is expected to smooth out in the next few months. Analysts are predicting that wage rises will continue. "We expect earnings inflation to hit 4.5% by mid-2004," said Ross Walker, an economist at the Royal Bank of Scotland.

Manufacturing job numbers fell by almost 3% to 3.4m in the three months ending in February, the lowest level seen since records began in 1978.

There has not been an increase in manufacturing jobs since November 1998. This is at odds with recent industrial surveys, which have reported an upturn in the sector that is not yet seen in official data.

In contrast, revised data for service sector jobs for the last three months of 2003 showed a 319,000 rise in the number of jobs, an increase of 1.4%.