UK sees rise in labour costs as Bank of England watches

London - British labour costs rose during the second quarter at their fastest pace in more than two years, official data showed on Thursday, reinforcing the view that the Bank of England (BoE) is edging closer to raising interest rates.

The BoE has said it is monitoring unit labour costs - which balance pay against productivity - closely as it considers its first increase in borrowing costs in over seven years.

Productivity also rose in the second quarter, at its fastest pace in four years, but remained below pre-crisis averages.

"What we are seeing is wages rising faster than productivity, which is a thing that makes me read this as a hawkish or a hawk-friendly data release," Alan Clarke, a market strategist at Scotiabank said.

Sterling and gilts showed little reaction to the data.

Unit labour costs were up 2.2% in the quarter versus the same period a year ago, their fastest annual rise since late 2012, Britain's official statistics agency said. They rose 0.5% from the first three months of the year.

BoE Deputy Governor Ben Broadbent told Reuters last week that unit labour costs needed to grow faster than 2% for the inflation target to be hit.

The Bank's governor, Mark Carney, has said a decision on whether to start raising interest rates will become clearer around the turn of the year.

The rate outlook also hinges on whether the pick-up in wages is faster than the rise in productivity, analysts said.

Britain's persistent weakness in productivity at a time of solid growth has long puzzled many policymakers.

Productivity, as measured by output per hour, grew at its fastest quarterly pace since mid-2011 and at its quickest annual pace since late 2013, the Office for National Statistics said.

Output per hour rose 0.9% between April and June and was up 1.3% from the second quarter of 2014.

"If productivity does see significant ongoing improvement, it means that the economy has more potential to grow without generating inflationary pressures and that BoE has more scope to be light on the interest rate touch," Howard Archer, chief UK economist at IHS Global Insight.