July 18, 2007 / 9:21 AM / 13 years ago

Wage growth subdued even as job market tightens

LONDON (Reuters) - Average earnings rose at their weakest pace in 1-1/2 years in the three months to May despite a tightening labour market and above-target inflation.

The official data may provide some comfort to Bank of England policymakers seeking to rein in price pressures, although worries over capacity constraints and firms’ pricing power may keep them on their guard.

The figures were released on Wednesday at the same time as minutes of the central bank’s latest policy meeting which showed six of the nine members had voted for this month’s interest rate rise.

Sterling fell and interest rate futures rose after the figures as investors scaled back expectations for how far borrowing costs would rise.

“Both measures of unemployment indicate a gentle tightening in the labour market in recent months but critically that hasn’t resulted in an increase in pay pressures,” said Philip Shaw, chief economist at Investec.

The Office for National Statistics said average earnings including bonuses in the three months to May rose 3.5 percent compared with a year earlier. This was below forecasts for a rise of 3.6 percent and the weakest reading since November 2005.

Excluding bonuses, wage growth was also weaker than forecast, at 3.5 percent — its lowest since September.

However, the figures also showed a tightening labour market.

The number of people claiming jobless benefits fell by 13,800, more than the 8,000 fall forecast. On the internationally comparable ILO measure, the number of unemployed saw its biggest drop since December 2003. That took the jobless rate down to 5.4 percent, its lowest in a year.

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