Net migration to UK last year was 191,000

LONDON (Reuters) - Net migration to Britain eased further from record peaks last year as the number of people leaving the country hit a record high, offsetting inflows from the European Union, official data showed on Wednesday.

Immigration from eastern Europe since the expansion of the European Union in 2004, while stoking political debate, has helped keep a lid on wage inflation as immigrant workers increase the pool of labour while tolerating lower pay.

But if people keep leaving and immigration slows, the Bank may worry more about the inflationary and economic impact of a tighter labour market.

"Recruitment difficulties plunged in late 2004 when the initial surge of migrants into the UK began," said Alan Clarke, an economist at BNP Paribas.

"But crucially since the start of this year recruitment difficulties have rebounded sharply. I would speculate that this is partly due to the slower migration flows. In turn we believe this will exert some upside pressure on wage growth."

Net migration peaked in 2004 at 244,000 but has fallen since then to register a 191,000 rise in 2006, the Office for National Statistics said.

Immigration from the EU continued to rise, with net migration rising 100,000, up from an 95,000 increase in 2005.

The number of people leaving rose to 400,000 from 359,000 in 2006 -- the highest since comparable records began in 1991.

INFLATION, GROWTH CONUNDRUM

While inflation has fallen back to around the government's 2 percent target after hitting a decade high of 3.1 percent in March, policymakers remain concerned about price pressures.

Factory gate inflation is at a 12-year high -- suggesting retailers may have to hike prices in coming months to cope with higher costs.

Any risk of a pick-up in wage inflation and a slowing in workforce growth will worsen the headache for the BoE as it juggles the prospect of a weaker economy in the wake of the credit crunch against a less benign outlook for prices.

But increased immigration has also dominated headlines over fears that public services may not be able to cope.

Indeed, net migration is far from falling into negative territory and economists point out that inflationary problems can arise from a sustained increase.

"There are pressures on the infrastructure from a large amount of people flowing into UK which to an extent is also a cause of inflation -- in terms of housing for example," said Philip Shaw, an economist at Investec.

And if the economy weakens, weaker net migration may not have such severe wage implications as fewer jobs are created.

"Migration on the whole has been good for the UK economy," said Howard Archer, an economist at Global Insight.

"If migration slows that does have repercussions, but if you are expecting growth to slow anyway it may be that there isn't such need for incoming migrant growth anyway."

The Labour party apologised last month for underestimating the number of foreign workers coming to Britain over the last decade by 300,000.

Britain was the only big European Union country to let citizens of new member states work without restriction when the bloc added 10 mainly East European members in 2004.

In response to concerns over pressure on public services, the government decided last month to prolong migration curbs on Bulgarian and Romanian workers -- the most recent EU entrants.

(Additional reporting by Sarah Marsh)