Wages in the UK grew at a faster than expected rate between May and July as unemployment levels fell, figures from the Office for National Statistics have revealed.

Average pay in the UK is now 3.5% higher than this time last year, despite public sector pay increasing at the weakest rate since May 1998 following Gordon Brown’s policy of imposing below-inflation increases.

The news that average pay is increasing will renew speculation that further interest rate rises may be necessary to avoid rising inflation.

The ONS attributed much of the increase in the rate of pay to City bonus payments.

The unemployment rate fell to 2.6% in August, the lowest level since April 2005.