UK public sector pay grew at its slowest annual pace since June 1998 in November, according to official figures yesterday which should make welcome reading for Chancellor Gordon Brown.

The figures from National Statistics also showed the Scottish labour market continues to perform strongly.

Weak public sector pay growth helped hold overall UK earnings growth at a 4.1% headline annual rate which would not normally worry the Bank of England on the inflationary front.

Official earnings numbers thus far support the view of Monetary Policy Committee dove David Blanchflower and recent ally Rachel Lomax, a deputy governor of the Bank, that growth in the UK labour force through immigration and increased participation may well constrain wage settlements and ultimately inflation.

However, a greater-than-expected fall of 5500 in UK claimant-count unemployment in December may worry those members of the nine-strong MPC who see less labour market slack.

Economists also highlighted the potential for a jump in annual inflation on the old all-items retail prices index measure to a 15-year high of 4.4% in December, announced on Tuesday, to feed through to pay settlements in the key start-of-year bargaining period. They also noted City bonuses were yet to show up in the earnings numbers.

This mindset meant that earnings numbers which would have been expected to temper expectations of a further rise in interest rates were shrugged off, and the pound jumped to a fresh two-and-a-half-year high against the euro. The single currency fell as low as 65.63p during trading yesterday.

It remains to be seen whether the suddenly-found hawkish mentality of the City, which failed to anticipate last week's quarter-point rise in base rates to 5.25%, is shared by a majority of MPC members.

However, Brown has been at pains to emphasise the need for public sector pay discipline. The chancellor wants public sector settlements to be based on the Bank of England's target of 2% for annual consumer prices index inflation, rather than the old RPI measure.

Brown is therefore likely to welcome the news that annual growth in public sector pay on the headline measure, which strips out volatility by taking the latest three months together, slipped from 3.3% in October to 3.2% in November. The November number was the lowest since June 1998.

Taking November in isolation, the wages picture also looks relatively benign with annual growth in pay across the whole economy of just 3.9%. This was down from 4.2% in October.

In spite of the benign earnings growth figures, economists remained on high alert for another rise in UK interest rates from the Bank of England. Fears of another increase have been fuelled by the snap nature of last week's rise in base rates, which followed quarter-point increases last August and November.

Tuesday's news of a jump in annual CPI inflation from 2.7% in November to 3% last month and the leap in RPI from 3.9% to 4.4%, as November's rise in interest rates fed through to mortgage payments, have added to expectations of a further increase in the cost of borrowing.

However, MPC members have emphasised the question of whether wage growth is pushed up by the jump in consumer price inflation and this will be key to their interest rate deliberations. Consumer price inflation has been fuelled in large part by surging energy costs, which have subsided more recently.

The seasonally-adjusted fall of 5500 in UK unemployment during December was the third consecutive monthly drop - the longest run of decreases since the October 2004 to February 2005 period. It took the claimant-count to 943,100 with the unemployment rate steady at 3.0%.

Claimant-count in Scotland fell by 900 in December to 85,400, signalling the labour market north of the border punched above its weight in a UK context.

Over the past year, the Scottish labour market has performed much better than the UK as a whole on claimant-count. Scottish claimant-count in December was unchanged from the same month of 2005. This was a much better showing than a corresponding rise of 35,200 UK-wide.

On the government's favoured International Labour Organisation measure, Scottish unemployment in the September to November period was down 2000 on a year earlier at 137,000. This measure is wider than claimant-count, also including those seeking work but not claiming Jobseekers' Allowance.

UK-wide, ILO unemployment in the September to November period was up 139,000 on the same three months of 2005.

Scotland fared poorly on ILO unemployment in the latest quarter, but this was solely the result of its total potential workforce jumping by 25,000 compared with a drop of 14,000 UK-wide. Scottish ILO employment showed robust growth during the period.

Scottish ILO unemployment was in September to November up 12,000 on the preceding three months at 137,000, with the jobless rate jumping from 4.8% to 5.2%. This contrasted with a fall of 29,000 UK-wide to 1.674 million, with the rate flat at 5.5%.

ILO employment in Scotland between September and November came in at 2.48 million, up 13,000 on the preceding three months and 14,000 higher than a year earlier.

UK employment on the ILO measure came in at 29.029 million, up 14,000 on the quarter and 274,000 higher than in the same three months of 2005.

Chancellor Gordon Brown was yesterday relaxed about the jump in UK inflation, which he blamed on a "trebling in oil prices and pressure in the housing market". He said: "The Bank of England acted pre-emptively (in raising rates) last year and last week."

Alf Young Page 23