UK jobless rate set to fall to fresh low in 2018 - BoE's Saunders

By Andy Bruce and David Milliken

LONDON (Reuters) - British unemployment is likely to fall further than the Bank of England and most other economists expect this year, pushing pay growth to near its fastest rate since the financial crisis, BoE policymaker Michael Saunders said on Wednesday.

The near-term outlook is mixed as Britain prepares to leave the European Union in just over a year, Saunders said in a speech at a financial industry event in London. But growth this year could still see the economy expand faster than its sustainable long-term trend, creating inflation pressures.

"Balancing out the positives and negatives, the near-term outlook for the economy is not great, but nor is it terrible," Saunders said.

"To put it differently, economic growth of around 1.5 to 2.0 percent year-on-year may, as over the last year, be enough to tighten the labour market significantly further," he said.

Saunders stuck close to existing BoE language that interest rates are likely to need to rise further over time, and that any increases would be "limited and gradual".

After the BoE raised interest rates for the first time in a decade in November, the central bank indicated that market expectations of two further quarter-point rate rises before the end of 2020 were reasonable.

Fellow MPC member Silvana Tenreyro said on Monday that the BoE had "ample time" before it needed to raise rates again.

Most economists polled by Reuters at the start of December predicted that the next rise in rates would come in late 2018, though some see a chance of a rise as early as May.

Saunders - who first voted for rates to rise in June 2017 - declined to comment on the most likely path for rates in a question-and-answer session after his speech.

UPBEAT FORECASTS

Nonetheless, his view on the labour market is more upbeat than the last set of central bank forecasts in November.

He predicts that unemployment will fall to 4 percent or lower this year from 4.3 percent in the three months to October, below the BoE's forecast in November that it would edge down to 4.2 percent by the end of 2017 and stay there in 2018.

The current rate of unemployment is the lowest since 1975.

Wage growth is likely to rise to 3 percent or higher this year, Saunders said. The last time British wages grew more than 3 percent on a sustained basis was in 2009.

Past BoE wage forecasts have repeatedly been too rosy. Saunders said he thought this time was different, partly because headline annual wage growth of 2.3 percent in the three months to October had been depressed by the effect of low-skilled people joining the workforce. That trend was now easing.

Saunders also said Britain's departure from the EU, and a stronger economy in continental Europe, meant that downward pressure on British wage growth from high levels of unemployment in other parts of the EU was likely to reduce.

Reduced immigration from the EU - and even the possibility of net emigration in future - was also likely to lower the rate at which Britain's economy can grow without generating excess inflation, he said. This "potential" growth rate may now be below 1.5 percent, Saunders estimated.

Inflation reached its highest level in nearly six years at 3.1 percent in November. It dropped to 3.0 percent in December, but the BoE does not expect it to return to its 2 percent target before the end of 2020.

The BoE is due to publish fresh growth and inflation forecasts after its next interest rate announcement on Feb. 8.

(Writing by David Milliken; Editing by Toby Chopra, Larry King)