Earnings create rate-rise pressure

PUBLISHED : Thursday, 16 July, 1998, 12:00am
UPDATED : Thursday, 16 July, 1998, 12:00am

Earnings growth in Britain leapt much higher than expected in April, it was revealed yesterday, putting pressure back on further interest rate rises, and contradicting Tuesday's benign inflation data.

Headline earnings growth rose 5.4 per cent in April, up from a revised 5.3 per cent in March, higher than economists expectations of about 5.1 per cent.

Unemployment also rose for the second consecutive month, expanding by 700 in June.

'I think it suggests that interest rates are likely to go up in August, probably by a quarter, and maybe by a half per cent,' Michael Saunders, an economist at Salomon Smith Barney, said.

He dismissed the 0.5 per cent drop in inflation in June, reported on Tuesday as due to lower seasonal spending on food items and goods, caused by a strong sterling exchange rate.

Yesterday, the Bank of England released the minutes of the June meeting of the Monetary Policy Committee (MPC) - which surprised markets by raising interest rates to 7.5 per cent - showing that eight of the nine members of the MPC had voted for the interest rate rise.

Although the MPC opted to put rates on hold at the July meeting last week, economists said the June minutes showed how hawkish on interest rates the committee had become.

The FTSE-100 index, which had earlier leapt to a new high, dived on the data, to stand 28.5 points up at 6,128.7, while sterling leapt against the deutschemark to reach 2.95, up sharply from its close of 2.9456 marks.

Robin Aspinall, chief economist at National Australia Bank, said it seemed clear that the MPC was intent on continuing to raise interest rates until wage inflation had subsided, and as a consequence was putting the economy in danger of entering a recession.

'The sorts of lead indicators you can rely on, like the Confederation of British Industry's survey, where there is a close correlation between business optimism and what happens in the economy, are pointing to gross domestic product growth of less than 1 per cent in the next quarter or two,' he said.