Britain's unemployment rate has unexpectedly dropped and wage growth has slowed to the lowest level in nearly two years, likely reassuring the Bank of England (BoE) that inflation pressures are easing, official data showed 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 (ONS) said.

However, the jobless rate – based on a survey the ONS is currently overhauling – fell from 4.4% to 4.2%, its lowest since February. Analyst consensus had been for a small rise in the rate.

Sterling strengthened against the U.S. dollar immediately after the data was published.

"The number of job vacancies continues to decline, although the total number remains above pre-pandemic levels," added ONS director of economic statistics Liz McKeown.

When it cut interest rates on Aug. 1 after keeping them at a 16-year high of 5.25% for nearly a year, the BoE said it would continue to keep a close eye on wage growth. Investors see a roughly one-in-three chance of a September BoE rate cut.

Pay is still growing at nearly double the pace the BoE thinks is compatible with keeping inflation at its 2% target. Data on Wednesday is likely to show inflation back above target.

"Today's data are consistent with a gradual and cautious dialing down of restrictive policy. But... firming GDP growth, if sustained, could lead to a firming labor market recovery – which could result in a more shallow rate-cutting cycle," said Sanjay Raja, chief U.K. economist at Deutsche Bank.

The number of people at work rose by 97,000, far more than the 3,000 forecast by economists.

Raja said the lower unemployment rate might also be down partly to a slight overstatement of joblessness in the past by the ONS. It said response rates to its labor force survey had improved since the start of the year.

The Resolution Foundation think tank said it feared the ONS was still undercounting people in work.

Pay pressure easing?

Employers expect lower headline inflation to reduce wage pressures. The Chartered Institute of Personnel and Development on Monday said employers expected to raise pay by 3%, the lowest in two years.

Last month, Britain's new Treasury chief, Rachel Reeves, approved pay rises of at least 5% for millions of public sector workers.

The BoE is more focused on private-sector pay, which it forecasts will slow to 5% in late 2024 and 3% in late 2025.

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

After adjusting for lower inflation, workers are now doing better. Real pay, excluding bonuses, is 3.2% higher than a year ago, the joint-biggest annual increase since mid-2021.

Growth in average earnings, including bonuses and other one-off payments, dropped sharply to 4.5%, its lowest level since late 2021. This is due to backdated payments for public health workers a year earlier.

Public sector regular pay growth dropped to a five-month low of 6.0% from 6.4%.

The BoE also looks at other inflation pressures, such as labor shortages, which leaped during the COVID-19 pandemic.

The number of unfilled job vacancies fell to a three-year low of 884,000 in the three months to July, down from 1.3 million in mid-2022 but still higher than in early 2020.

"Vacancies are still challenging to fill in a number of pockets and near-record working age inactivity at 9.4 million continues to be a key factor behind this," said Jack Kennedy, senior economist at hiring platform Indeed.

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 – increased to 22.2% in the three months to June, near an eight-year high.

The new government wants to raise labor force participation to 80%, a level reached by the Netherlands, Switzerland, and New Zealand but not larger economies.

Reeves said Tuesday's 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. The budget is due on Sept. 30.