UK workers see strongest growth in basic pay in nearly a decade

By William Schomberg and David Milliken

LONDON (Reuters) - The basic wages of workers in Britain rose at their fastest pace in nearly a decade over the summer months, backing up the Bank of England's view that a long period of weak pay increases is ending.

Earnings, excluding volatile bonus payments, rose by an annual 3.1 percent in the three months to August, the Office for National Statistics said on Tuesday.

That was the highest since January 2009 and above all forecasts in a Reuters poll of economists.

Sterling increased to its highest level of the day against the U.S. dollar and government bond prices edged down as investors factored the stronger-than-expected wage growth into their projections for when the BoE will next raise interest rates.

Philip Shaw, an economist at Investec, said he expected a rate hike in February, assuming Britain can seal a deal to avoid an economically damaging exit from the European Union in March, followed by another hike later in 2019.

"We may now be exiting a period of relatively low pay growth," Shaw said on Tuesday. "The implication is that the BoE will be keener to raise rates."

Including bonuses, total earnings rose by 2.7 percent, slightly above the poll's median forecast of 2.6 percent.

The BoE's chief economist, Andy Haldane, said last week that he saw signs of a "new dawn" for British wage growth.

The central bank has said it plans to continue raising interest rates gradually over the next three years, despite the economic uncertainty caused by Brexit, in large part because of the inflation pressure that rising pay will create.

EASE OF THE SQUEEZE

Economists have been puzzled why wages were growing so slowly even as unemployment fell sharply.

Pay growth for Britain's workers slowed to as low as 0.5 percent in 2014. Despite the recent improvement it remains stuck below the 4 percent increases that were the norm before the global financial crisis.

The unemployment rate held at its four-decade low of 4.0 percent in the three months to August, the ONS said.

But the number of people in work fell by 5,000, the first decrease in nearly a year. The Reuters poll of economists had pointed to a rise of 11,000.

The ONS said the fall in employment was driven in part by fewer students seeking work than earlier in the year.

British households - whose spending is the main driver of the country's economy - have struggled for much of the past decade as their wages grew more slowly than inflation.

Data due on Wednesday is expected to show Britain's consumer price inflation stood at 2.6 percent in September, below a peak of 3.1 percent in November last year but still offering only modest improvement in spending power for workers.

The ONS said in real terms, adjusted for its CPIH measure of inflation, total earnings edged up by an annual 0.4 percent in the June-August period.

The BoE has said it expects growth in total pay of 2.5 percent a year by the end of 2018, rising to 3.5 percent by the end of 2020, enough to justify the central bank's plan to gradually raise interest rates over the period.

(Writing by William Schomberg, editing by Ed Osmond)