Interest rate rise on the cards in new year as earnings surge and unemployment falls

INCREASED OVERTIME and bonus pay took average earnings surging in October, while the number of people on jobless benefits fell again in November.

The unexpectedly strong pay pressures make the Monetary Policy Committee likely to raise interest rates in the New Year as insurance against higher inflation, analysts said. "This is exactly the sort of thing we expect the MPC to use to justify a quarter-point increase in rates on 13 January," said Adam Law of Barclays Capital.

The underlying annual rate of earnings growth climbed to 4.9 per cent in August-October from 4.7 per cent in the previous three month period. In October the rate climbed to 5.1 per cent.

The Office for National Statistics said higher bonuses and overtime pay in manufacturing and services contributed to the pick-up. Employment in manufacturing has continued to fall, but total employment has risen. In another sign of jobs market tightness, unemployment fell on both measures. The claimant count declined in November by 10,600 to 1,192,400 or 4.1 per cent of the workforce, the lowest since February 1980.

The labour-force survey measure was down 12,000 at 1,716,000. Unemployment was 5.9 per cent in August-October, the lowest since the survey started in 1984. The detail of the figures suggested that in the jobs market at least the north-south divide is narrowing. In the latest 12 months the North West, Wales, Yorkshire and Scotland have seen the biggest rises in the proportion of people in work. London is near the bottom of the league, while the South East has seen a small decline in its employment rate.

Scotland, Yorkshire and the North West, along with the South West, have enjoyed the biggest declines in unemployment rates, London and the South East among the smallest. Unemployment rose in the North East, but so did employment, suggesting the region's economic activity rate has jumped, with more people returning to the workforce.

Tessa Jowell, employment minister, yesterday said a study by the National Institute for Economic and Social Research showed more young people have moved off benefits and into jobs than would have done without the New Deal. In addition, thanks to the additional economic activity generated, the research found the New Deal is close to self-financing.

Separately, David Blunkett, Secretary of State for Employment, repeated the Government's call for pay restraint. "We need responsible wage behaviour across the public and private sectors if the economy is to continue to steer a course of stable and steady growth."

City economists believe the MPC will not rely on self-restraint in pay to keep inflation on course for its target. In manufacturing increased cost efficiencies are more than offsetting the rises in pay. Yesterday's figures also showed productivity in manufacturing increased by 5.2 per cent in the year to the August-October period, while unit labour costs fell 0.9 per cent - both the best since December 1994.

However, the latest figures for the economy as a whole show productivity growth slowed to just 0.6 per cent in the year to the second quarter, while growth in unit wage costs picked up to 4.4 per cent. The MPC left interest rates unchanged at 5.5 per cent this month. Most economists expect them to climb to around 6 per cent by the middle of 2000.