June 17, 2015 / 8:51 AM / 4 years ago

UK pay growth hits higher gear, puts rate hike back in focus

LONDON (Reuters) - British workers’ pay grew at its fastest rate in nearly four years in the three months to April and a Bank of England policymaker said the data underscored how interest rates are on course to rise.

A worker arrives at his office in the Canary Wharf business district in London February 26, 2014. REUTERS/Eddie Keogh

Britain’s long-awaited recovery in living standards seemed to be gathering momentum as a key measure of earnings rose more quickly than expected, data showed on Wednesday.

Sterling climbed to a seven-year high against a trade-weighted basket of currencies. Bond investors brought forward their bets on a first rate rise, with an outside chance it could happen later this year.

On Wednesday evening, BoE policymaker Kristin Forbes said: “The next move in interest rates is going to be up and it’s coming at some point in the not-too-distant future.”

“Especially as we continue to see wage growth as we’ve learned about today, that will make people realise that the date when interest rates go up is coming closer,” she added in an interview with broadcaster ITV.

In remarks made later after a speech, Forbes said “we still do have some time” before interest rates needed to rise because the Bank expected recent sharp falls in the unemployment rate to slow.

Combined with near-zero inflation that is boosting spending power and data showing an increase in foreign direct investment, the earnings numbers suggested Britain’s economy was picking up momentum again after growth slowed at the start of the year.

The Office for National Statistics said total average weekly earnings in the three months to April, including bonuses, rose by 2.7 percent compared with the same period a year earlier.

That was the strongest increase since the summer of 2011.

Excluding bonuses, the increase in pay was the strongest since early 2009, when the financial crisis was raging.

Economists said the figures probably took the BoE by surprise. Last month, it cut its forecast for annual wage growth in the last three months of 2015 to 2.5 percent from 3.5 percent, as it lowered its overall growth outlook for Britain.

“That seems to have been a case of unfortunate timing,” Alan Clarke, an economist with Scotiabank, said. “...Wages are no longer an obstruction to a rate hike.”

CHANGING MOOD AT BOE?

The BoE said on Wednesday its nine interest rate-setters all voted earlier this month to keep borrowing costs at their record low, where they have sat since early 2009. But two again described their decision as “finely balanced”.

Sam Hill, an economist at RBC, said there was a chance that more than two policymakers could soon be tempted to vote for rate hikes, especially if a recent recovery in fuel prices continues to push up inflation further away from zero.

Martin Weale and Ian McCafferty voted for a rate rise in late 2014 before dropping that call in January as oil prices plunged.

But the BoE would want to be sure that the step-up in pay growth was not a blip and it would be reluctant to raise rates ahead of the U.S. Federal Reserve, which could push up sterling, said Elizabeth Martins, an economist at HSBC.

Britain is also girding for possible fallout from Greece’s debt showdown. The government is speeding up preparations for a possible Greek exit from the euro zone, a spokeswoman for Prime Minister David Cameron said.

The ONS said on Wednesday that Britain’s unemployment rate was stable at 5.5 percent in the three months to April, holding at its lowest level since 2008.

A surge in jobs growth had lost some steam ahead of Britain’s national election last month. Uncertainty for employers lifted when Cameron’s Conservative Party won an outright parliamentary majority in May, defying poll predictions of an inconclusive result.

Some companies are now concerned that his plan to hold an in-out referendum on Britain’s membership of the European Union by the end of 2017 represents a new element of uncertainty.

Last week, ratings agency Standard & Poor’s said it could cut Britain’s triple-A rating because of the risk of an EU exit.

($1 = 0.6357 pounds)

Additional reporting by Kate Holton, Andy Bruce and Kylie MacLellan; Editing by Peter Graff and John Stonestreet

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