The prospect of an interest rate rise before the summer has receded after the number of people out of work in Britain rose at the fastest rate in almost five years.

Fuelled by an increase in unemployment among young people under the age of 24, the number of jobless rose by 46,000 to stand at 1.47 million in the three months to December, according to the Office for National Statistics.

The rise in unemployment, which comes after it fell to levels not seen since the mid-1970s, pushed the jobless rate to 4.4% against City forecasts for the level to remain unchanged at 4.3%.



The worsening picture was emphasised by figures showing a slowdown in the creation of jobs, a fall in the number of hours worked and a dip in productivity growth.

The Bank of England said this month that the UK economy was beginning to overheat after a sharp rise in inflation and a tightening labour market. In its quarterly inflation report it said an interest rise was only months away if the rising demand for workers, which is reflected in the huge growth in vacancies, continued to force up pay growth.

Wednesday’s ONS data showed that average weekly earnings excluding bonuses increased by 2.5%, beating City forecasts for the rate of pay growth to stay unchanged at 2.4%. However, this remains below the rate of inflation, meaning workers are yet to see real wage growth.

Maike Currie, an investment director at fund manager Fidelity International, said: “With the Bank of England increasingly pinning the chances of further interest rate hikes on accelerating pay growth, the prospect of an early rate rise seems unlikely.”

Compared with inflation, take-home wages were worth 0.3% less in December than the year before.



The TUC general secretary, Frances O’Grady, said: “The great pay squeeze continues. This is the 10th month in a row that real wages have fallen.” Most of the increase in wages over the last year has gone to managerial and professional workers while those on lower incomes have relied on increases in the “national living wage” to boost their living standards.

On a more upbeat note, the ONS said there was an increase in the number of full-time employees and a decrease in part-time and self-employed work.

John Hawksworth, the chief economist of accountancy group PwC, said it was encouraging that previously inactive people were seeking work in greater numbers, some of them finding jobs and others still searching and so being classified as unemployed. He said this showed that the rise in unemployment was a spin-off from people entering the jobs market.

Some analysts said the contradictory signals from the employment figures made it more difficult to predict whether the Bank’s interest rate setting committee would increase rates by 0.25% to 0.75% at its meeting in May.

John Philpott, the director of the Jobs Economist consultancy, said the economic picture was perplexing because pay had increased at a time when unemployment rose, which is unusual because pay rises tend to come when there are fewer people out of work.

“It clearly adds to the conundrums facing economists, not least those at the Bank of England when they next consider if and when to raise interest rates,” he said.

The total number of hours worked fell by 0.3%, while growth in output per hour worked, which is a measure of labour productivity, dipped from 0.9% to 0.8%.

“In other words, a labour market that struggled to boost pay when getting tighter, just saw pay strengthen when conditions got a bit weaker,” said Philpott. “This pattern is difficult to explain, though may become clearer as more data become available. However, it clearly adds to the conundrums facing economists, not least those at the Bank of England when they next consider if and when to raise interest rates.”