Slower earnings growth hints at end to rate rises

Fears that falling unemployment will lead to a wage and price spiral faded yesterday when official figures showed a sharp slowing in the growth of average earnings, increasing speculation that interest rates have peaked.

With millennium-related overtime and January bonus payments dropping out of the calculation, earnings growth in the three months to April fell to 5.1%, down 0.6 percentage points from the March figure. This was despite a further drop in the number of people out of work, according to data from the office for national statistics.

Although the market is still prepared for a further quarter point increase in borrowing costs by the end of the year, some City economists said the next move could be down.

Geoff Dicks, at Greenwich NatWest, said: "We still need to slow the underlying rate of growth since the ex-bonus element [of earnings increases] is running at 4.4% against the more acceptable sub-4% rate that we had over most of last year.

"But the message today is that a tight labour market per se is not necessarily a threat to inflation and confirms what we have long argued: that the upside on rates is limited. Who knows? After these data it may have disappeared completely."

The decline in earnings growth was accompanied by an 8,600 drop in the claimant count in May to a new 20-year low of 1,109,00, and a 60,000 fall to 1,684,000 in the alternative measure of unemployment, the International Labour Organisation definition, which has a wider scope.

The employment level hit a new high of 27,873,000 in the latest three months, up 112,000 on the previous quarter, though the headline figure masked continued divergence between the performance of buoyant service and depressed manufacturing industries. Manufacturing shed 2.5% of its workforce in the latest three months compared to the same period a year ago as the strong pound and intense global competition forced firms to cut costs.

Employment minister Tessa Jowell said: "This is good news for the economy and for people seeking work...These figures are about real jobs for real people." The minister announced the launch of three new specialist teams in Thanet, East Ayrshire and Hartlepool, each with £1.5m to invest over the next year, to help people find work.

David Walton, senior economist at Goldman Sachs, the US investment bank, cautioned that good inflation news from the fall in average earnings was being offset by the continued weakening of the pound, which pushes up import prices.

He added that higher public spending would ensure that domestic demand remained robust, keeping upward pressure on interest rates. He is continuing to forecast another 0.5 percentage points on the Bank's 6% repo rate.

But Darren Winder of UBS Warburg said: "Overall, the decline in average earnings growth coupled with below target inflation and the prospect of a substantial decline in house price inflation suggests that interest rates are probably more likely to fall than rise over the balance of the next 6 to 12 months."