Hopes of cut in interest rate hit by rising pay settlements

Lingering hopes of a cut in interest rates this week will be dealt another blow today by new figures showing pay deals surged last month.

A third of all new pay deals were worth at least 4 per cent extra a year while another 40 per cent were between 3 and 3.9 per cent, a firm of labour market analysts said.

This means almost three-quarters of the most recent wage deals are running at more than four times the rate of inflation, which is currently at a 43-year low of 0.7 per cent.

Deals agreed in January averaged between 2 and 3.5 per cent although one agreement was for a 7.5 per cent rise, Incomes Data Services said.

Meanwhile an index produced by the business advisers BDO Stoy Hayward suggests that the economic decline had bottomed out, following uncertainty prompted by global downturn and the war in Afghanistan.

But the Engineering Employers Federation last night urged the Bank to cut rates by a quarter point to 3.75 per cent to save jobs and boost investment in manufacturing.

Stephen Radley, the EEF's chief economist, said: "Raising rates and tolerating an undershoot, or even hinting at such a move, could endanger confidence in the committee's purpose and will place the manufacturing recovery at risk."

Hopes of a rate cut have fizzled out following a run of data pointing to recovery. Minutes of the previous meeting of the Monetary Policy Committee showed that the Bank might accept inflation a little below target rather than risk widening the UK's already yawning economic imbalances.

A poll of 29 economists last week found 28 expected the MPC to leave rates unchanged when it announces its verdict on Thursday. The remaining economist forecast a cut.

"Tolerance of inflation at 2 per cent, rather than the target of 2.5 per cent, further reinforce the case that rates have troughed at 4 per cent," said Philip Shaw, an economist at Investec. "If all goes well with the global economy, the first policy tightening could take place during the summer."

The IDS report says the picture is "mixed" for pay bargaining, with seven increases below 2 per cent and four pay freezes. The report highlights a pay divide with industries such as construction and train operation suffering skills shortages and the public sector awarding high deals. Pay freezes are most likely in the engineering industry, which is deep in recession, and the hotel trade, still affected by foot and mouth disease and then 11 September.