LONDON (Reuters) - Britain's unemployment rate unexpectedly dropped in the three months to February, reviving speculation the Bank of England will start raising interest rates earlier than it has signalled.
Wages also caught up with inflation for the first time in nearly four years, helping the government to ward off charges of a cost-of-living crisis before next year's national election.
Sterling jumped and government debt prices fell after the Office for National Statistics reported on Wednesday that the jobless rate sank to a five-year low of 6.9 percent, down from 7.2 percent in the three months to January. Analysts polled by Reuters had forecast a decline to 7.1 percent.
The sharp fall - helped by a big increase in self-employed people - took the rate below the 7 percent level originally set by the Bank for considering an increase in interest rates.
The Bank has since given fresh guidance about when it might start to tighten monetary conditions. But economists said they expected discussions among policymakers would intensify.
George Buckley at Deutsche Bank said there was no prospect of an imminent rate hike, with markets pricing in a first increase in the first quarter of next year.
"This fall in unemployment nevertheless means there will be more focus on the minutes of future meetings for signs any member may be close to voting for higher rates," he said.
Britain's labour market rebounded in 2013, wrong-footing the Bank. It had said in August it would start thinking about raising record-low interest rates when unemployment fell to 7 percent.
As the jobless rate unexpectedly raced towards that level, the Bank updated its guidance in February. It said measures of spare capacity in the economy were the best way to assess its plans for tightening borrowing conditions, once unemployment hit the 7 percent level.
At the time, the Bank suggested that a first rate hike might come in the second quarter of 2015.
A factor behind the latest plunge in unemployment was a jump in the number of self-employed people, which hit a record high.
Nigel Meager, director of the think tank Institute for Employment Studies, said the number of employees grew 3 percent over the last two years, but the number of self-employed jumped by 9 percent.
"Key questions surround whether this reflects a wave of new business creation, or whether, as some have suggested, it mainly consists of a motley collection of freelancers aiming to keep a toehold in the labour market until they are able to return to regular employment," Meager said.
A new survey showed that more than a quarter of people who became self-employed in the last five years would prefer to be employed by someone else. The survey was conducted by polling firm Ipsos MORI for the Resolution Foundation, a think tank.
Wednesday's data showed total pay growth picked up to 1.7 percent in the three months to February. That matched the increase in consumer prices in the month of February alone.
It was the first time since April 2010 that pay growth had not lagged the consumer price index.
Economists in the Reuters poll had expected pay to grow by a stronger 1.8 percent.
Excluding bonuses, pay growth still lagged inflation at 1.4 percent in the three months to February.
There were signs that pay will start to outpace the CPI soon. In the month of February alone, total growth in weekly earnings was 1.9 percent, the ONS said, while in March consumer prices rose 1.6 percent.
An end to the erosion of wages by inflation should help the Conservative-led government. It is under fire from the opposition for not restoring strong growth over the past year.
Chancellor of the exchequer George Osborne acknowledged that many families remained under strain. "But today's news supports the argument we have made all along that the only way to see rising living standards is to grow the economy," he said.
"I don't think the government should get complacent," Labour's work and pensions spokeswoman, Rachel Reeves, told the BBC. "The cost of living crisis ... still poses a real challenge to families up and down the country."
The independent Office for Budget Responsibility has said earnings growth is likely to stay subdued and real hourly earnings will probably lag pre-crisis levels until the end of 2016, more than eight years after the financial crisis began.
Additional reporting by David Milliken; Writing by William Schomberg; Editing by Larry King