LONDON (Reuters) - British workers’ productivity grew at the fastest pace since late 2016 in the three months to June and labour cost growth slowed, suggesting the home-grown inflation pressures that the Bank of England is watching closely remain muted.

Workers are seen crossing the Millennium Bridge during the morning rush hour in London, Britain, September 25, 2018. REUTERS/Toby Melville

Output per hour rose by 1.4 percent compared with a year earlier, the biggest increase since the three months to December 2016, albeit a fraction below an initial estimate of 1.5 percent, official data showed.

Britain’s chronically weak productivity has limited pay growth, but its potential to push up inflation is why the BoE has started to raise interest rates, despite sluggishness in the overall economy ahead of Brexit.

Workers in Britain are about 20 percent less productive than their rivals in the United States, Germany and France and productivity has barely grown since the financial crisis, in contrast to growth of more than 2 percent a year before.

“The UK economy is not out of the woods yet and a significant challenge remains to bring back productivity performance to where it needs it to be in order for households to see any meaningful rise in their purchasing power,” KPMG economist Yael Selfin said.

Most of the improvement in the second quarter was driven by a decline in the number of hours worked rather than higher output.

Friday’s figures from the Office for National Statistics offered some good news for the central bank, however.

Growth in unit labour costs - a measure of how much it costs businesses to produce a given level of output - slowed to 2.0 percent in the second quarter from a one-year high of 2.7 percent in the first three months of 2018.

The BoE predicts unit labour cost growth will stick at 2.75 percent in 2018 and slow to 2.25 percent in 2019 while productivity will grow just 1 percent a year through to 2020.

Howard Archer, an economist at consultants EY ITEM Club, said rising staff costs and shortages were likely to encourage firms to invest more in labour-saving, though Brexit in March 2019 may hamper other investment.

Data from the Recruitment and Employment Confederation published earlier on Friday showed falling demand for staff and a jump in starting salaries.