LONDON British pay growth dropped to its lowest in nearly two years in the second quarter, likely reassuring the Bank of England that inflation pressures are easing, while the unemployment rate unexpectedly dropped, official figures showed on Tuesday.

Average weekly earnings, excluding bonuses, were 5.4% higher than a year earlier in the three months to the end of June, down from 5.8% in the three months to May and the lowest since August 2022, the Office for National Statistics said.

However, the jobless rate - which is based on a survey the ONS is currently overhauling - unexpectedly fell from 4.4% to 4.2%, its lowest since February, bucking economists' expectations in a Reuters poll for a rise to 4.5%.

Sterling rose against the US dollar immediately after the data was published and investors scaled back slightly their bets on a September BoE rate cut to around 35% from 38% on Monday.

The BOE said it would continue to keep a close eye on wage growth when it cut interest rates on Aug. 1 after keeping them at a 16-year high of 5.25% for nearly a year.

Regular pay is still growing at nearly double the pace the BOE thinks is compatible with keeping inflation at its 2% target over the medium term, and the central bank expects data on Wednesday to show inflation back above target.

"The persistence of strong wage growth also raises concerns about stickier inflation, which may prompt the Bank of England to remain cautious about further interest rate cuts," said Monica George Michail, an economist at the National Institute of Economic and Social Research think tank.

Employers expect lower headline inflation to reduce pressure to raise wages over the coming year. The Chartered Institute of Personnel and Development on Monday said employers expected to raise pay by 3% - the lowest expectation in two years - while a BOE survey pointed to pay rises of 4.1%.

Last month newly elected Labour Party finance minister Rachel Reeves approved pay rises of at least 5% for millions of public sector workers, including a 22% rise for junior doctors over two years to resolve a long-running industrial dispute.

The BOE is more focused on growth in private-sector pay, which it says has a more direct impact on inflation, and forecasts this will slow to 5% in the final quarter of this year and 3% in late 2025.

Growth in regular pay in the private sector slowed to 5.2% from 5.6% in the three months to May, its lowest since May 2022.

Annual growth in average earnings including bonuses dropped sharply to 4.5%, its lowest since late 2021, due to backdated wage payments for public health workers in June 2023.

The labour market inactivity rate - which shows the percentage of working-age people who are neither in jobs nor unemployed, due to poor health, full-time study, caring responsibilities or other factors, edged up to 22.2% in the three months to June, close to an eight-year high.

Labour has said it wants to raise Britain's labour force participation rate to 80% - a level reached by the Netherlands, Switzerland and New Zealand but no larger economies.

Reeves said the data showed the importance of getting more people into work.

"This will be part of my budget later in the year where I will be making difficult decisions on spending, welfare and tax," she said in a statement.

Reeves is due to announce her first budget on Sept 30.

  - Reuters