Pay deals slip to 3.5% in 3 months

LONDON (Reuters) - Pay settlements eased to 3.5 percent in the three months to June from 3.6 percent in the three months to May, a report showed on Thursday, indicating that strong inflation is yet to drive wages markedly higher.

Income Data Services said in its monthly Pay Databank report April's reading was in line with the trend over the last 18 months, with much lower public sector deals keeping a lid on the broader measure.

Public sector workers, constrained by an unpopular government policy of pay restraint, only managed to secure average pay rises of 2.7 percent in the three months to June, compared to 3.5 percent in private services and 4.0 percent in manufacturing.

"The outlook for pay settlement levels is uncertain, especially with a recession looming," the report said. "However, inflation will have a key influence on the level of pay awards. Settlement levels tend to rise in periods of high inflation."

Bank of England policymakers are concerned that the highest rate of inflation -- 3.8 percent -- since the central bank was granted the power to set interest rates will become entrenched and encourage workers to seek much higher wages.

That would limit the scope for interest rate cuts despite a sharply slowing economy and could also make it harder to get inflation back down to its 2 percent target.

However, there has been little evidence of any feed through to wages so far, raising expectations among economists that the central bank will eventually lower interest rates to stave off recession and the risk of inflation undershooting the target.

(Reporting by Matt Falloon; editing by David Christian-Edwards)