Lowest jobless rate since 1975 fails to spur UK wage growth

By David Milliken and William Schomberg

LONDON (Reuters) - British workers' pay is still rising by less than inflation despite the lowest unemployment rate since 1975, official data showed on Tuesday, but weaker-than-expected wage growth is unlikely to stop interest rates rising next month.

Since February, Britain's central bank has homed in on what it sees as an increasingly tight labor market that risks keeping inflation above target, unless interest rates go up faster than it thought at the start of the year.

Tuesday's data showed average weekly earnings in the three months to February were 2.8 percent higher than a year earlier - unchanged from January's rate, a two-and-a-half-year high, but below economists' forecasts of a pick-up to 3 percent.

Consumer price inflation was 2.9 percent over the period.

Sterling fell after the data, but few economists thought the figures would stop the majority of Bank of England rate-setters from voting for an increase in rates to 0.75 percent next month.

"A lot of the detail in the report suggests the labor market is still tightening," said Philip Shaw, an economist with Investec.

The unemployment rate unexpectedly fell to 4.2 percent, its lowest since the three months to May 1975, while the employment rate for working-age Britons rose to its highest since records began in 1971 at 75.4 percent.

The robust employment data contrast with a more subdued picture for the rest of the economy.

British households - whose spending is the main driver of the country's economy - have been hit by the double whammy of slow wage growth and a jump in inflation, due mostly to the fall in the value of the pound after the 2016 Brexit vote.

The International Monetary Fund lifted its growth forecast for Britain this year to 1.6 percent on Tuesday due to stronger overseas demand, but this is below Britain's historic growth rate and that expected for most advanced economies this year.

WAGE PUZZLE

Central banks in many rich nations have been puzzled by the failure of wages to rise more quickly as unemployment falls, something they link to factors ranging from increased use of technology by firms to growth in the number of insecure jobs.

The BoE has been repeatedly wrong-footed in the past when predicting sustained improvements in wage growth.

Former BoE policymaker David Blanchflower and fellow academic David Bell said in a research paper earlier this month that British wages are unlikely to take off due to the still-large numbers of part-time workers who want to work longer hours.

The BoE forecast in February that wage growth would reach 3 percent by the end of the year, though since then some policymakers have said it could get there sooner, including Ian McCafferty in a Reuters interview last week.

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Before the financial crisis, British wages typically rose by just over 4 percent a year.

Since then, largely stagnant productivity has played a big role in keeping pay growth low, though over the last couple of quarters it has started to pick up.

Finance minister Philip Hammond welcomed Tuesday's record employment figures and said they could help lift productivity.

While greater numbers of people in work do not automatically boost productivity, if hiring becomes harder businesses may try to squeeze more out of existing staff, for example by investing in labor-saving technology.

Within the labor market data, there are some signs that pay growth is gathering momentum.

The weakness in headline pay growth was due to a fall in bonus payments compared with a year earlier, which the ONS said could be due to month-to-month volatility.

Annual pay growth excluding bonuses picked up to 2.8 percent from 2.6 percent, its highest since the three months to August 2015, and April data should reflect an increase in the minimum wage and some public-sector salaries.

Based on the ONS's preferred CPIH measure of inflation, which takes more housing costs into account than the CPI used by the BoE and government, pay growth edged ahead of inflation for the first time in almost a year.

However, some analysts said annual gains reflected weakness in early 2017, and that private-sector pay growth compared with three months earlier had slowed to a 10-month low.