Rising pay deals pile fresh pressure on interest rates

PAY deals have risen to their highest level in six years, fuelling fears that demands for bigger wages could boost inflation and trigger further interest rate rises.

The average settlement in the three months to January was 3.5 per cent, compared to 3.05 per cent during the three months to the end of December.

Although pay deals briefly touched the 3.5 per cent level in 2001, there has not been a sustained period of 3.5 per cent or above since 1998.

Pay and benefits specialists Incomes Data Services said the 1998 pay settlement level had coincided with a rise in inflation, to a peak of 4.2 per cent in May 1998. Inflation currently stands at 4.4 per cent.

Mervyn King, governor of the Bank of England, warned last week that it was the Bank's Monetary Policy Committee's job to ensure that "self defeating" pay rises "did not lead to a persistent rise in inflation".

Ken Mulkearn, editor of IDS Pay Report, said: "Many of the January awards included in our latest snapshot were reached before inflation rise sharply to 4.4 per cent, and it would be reasonable to expect that this figure will be a key influence on settlements concluded after it was awarded."