UK pay growth slows to 6-month low despite record employment

* UK annual pay growth slows to 2.5 pct in 3 months to May

* Unemployment holds at 4.2 pct, joint lowest since 1975

* Employment rate rises to new record of 75.7 pct

* Economists still expect BoE (Shenzhen: 000725.SZ - news) to raise rates next month

(Adds detail on hours worked)

By David Milliken and Alistair Smout

LONDON, July 17 (Reuters) - British workers' wages have

risen at the slowest rate in six months despite a record number

of people in jobs, challenging the Bank of England as it

considers raising interest rates next month for only the second

time since the financial crisis.

Average weekly earnings increased by an annual 2.5 percent

in the three months to May, slowing from 2.6 percent in the

three months to April and the weakest growth since November, the

Office for National Statistics said on Tuesday.

Pay growth excluding bonuses, which the BoE says sometimes

gives a better picture of the underlying trend, slowed by a

similar amount, to 2.7 percent. Both readings were in line with

the average forecast in a Reuters poll of economists.

Markets took the data in their stride, with the numbers

doing little to shift perceptions that the majority of the BoE's

policymakers will vote to raise rates after their next meeting

on Aug. 2.

"We see recent labour dynamics, including today's report, as

consistent with the Bank of England pressing ahead with an

August rate hike," said Investec (LSE: INVP.L - news) economist Victoria Clarke.

Britain's economy appears to be picking up after a slow

first three months of the year, when unusually heavy snow hurt

demand, and the central bank worries that growth is close to the

modest pace at which it will start to push up inflation.

Tuesday's data showed the unemployment rate remained at its

joint-lowest since 1975 at 4.2 percent while the proportion of

working-age people in employment rose to a record 75.7 percent

after 137,000 jobs were created over the three months to May.

But economic growth since 2016's Brexit vote has been weak

by historic standards due to high inflation and business

uncertainty, and on Monday the International Monetary Fund cut

Britain's growth forecast for 2018 to 1.4 percent.

BREXIT UNCERTAINTIES

Moreover, the BoE has been repeatedly surprised over the

years as the labour market has tightened but wages have risen

less than expected - a pattern seen to a slightly lesser degree

in most other advanced economies in recent years.

Pay growth is one of the pieces of data the Bank of England

looks at most closely for signs that domestic inflation

pressures are rising strongly enough for inflation to be at risk

of breaching its 2 percent target over the medium term if the

BoE does not raise rates in the immediate future.

BoE Governor Mark Carney said at the start of the month that

both the economy as a whole and pay were growing as the central

bank had forecast in May, smoothing the way for an August rate

rise.

But last week one of his deputies, Jon Cunliffe, who opposed

November's rate rise, said pay growth did not seem to be

breaking out of its recent 2.5-3.0 percent range and heading

towards the 3 percent growth rate that the BoE predicts for the

end of the year.

Britain had seen numerous "false dawns" for pay growth in

the past, and there could be more spare capacity in the labour

market than the central bank thought, he added.

Tuesday's figures showed average hours worked per employee

had fallen, giving scope for a future increase in output.

Investec's Clarke (Toronto: CKI.TO - news) said slower wage growth probably reflected

unusually big increases a year earlier. The BoE said last month

that wage growth could slow for a few months before picking up.

In July, more than a million public-sector health workers

will receive a pay rise of around 3 percent.

But other economists are less sure pay will accelerate on a

lasting basis.

"Low unemployment is yet to generate serious wage pressures

and Brexit uncertainties continue to reign," said Ian Stewart,

chief economist at accountants Deloitte.

"The case for raising interest rates in August may have

strengthened, but is hardly compelling."

(Editing by Alison Williams and Ed Osmond)