* Total pay growth hits 2.8 pct, highest since Sept 2015
* Employment rises much more strongly than expected
* Sterling rises on strong labor market figures
* Data boost chances BoE will raise rates in May
(Adds reaction, economist comment) LONDON, March 21 (Reuters) - British workers' overall pay rose at the fastest pace in more than two years during the three months to January, bolstering the chances that the Bank of England will raise borrowing costs in May. Sterling gained and British government bond prices fell after data showed wage growth including bonuses caught up with inflation for the first time in 10 months and employment grew more than analysts had expected. "It's strong across the board," Sam Hill, an economist with RBC Capital Markets, said. "This will trump any softness in yesterday's inflation numbers and will definitely reinforce expectations of a move by the BoE in May." Britain's economy slowed in 2017 as higher inflation - caused by the post-referendum fall in the pound - hurt the spending power of consumers, although forecasts of a bigger hit to growth were confounded and job creation was strong. The Office for National Statistics said workers' total earnings, including bonuses, rose by an annual 2.8 percent in the three months to January, the biggest increase since the three months to September 2015, after an upwardly revised 2.7 percent rise in the three months to December. That beat all forecasts in a Reuters poll of economists, which had pointed to a reading of 2.6 percent. Last month, BoE Chief Economist Andy Haldane said he expected to see overall wage growth pick up from January onwards, probably reaching 3 percent at the end of the first quarter, as well as a return to wage growth in real terms. Excluding bonuses, the pick-up in wage growth was a little more muted. Regular pay rose by 2.6 percent, as expected, following a 2.5 percent rise in the three months to December. January is an important month for wage settlements and a survey published overnight suggested pay awards by British employers rose by the most in more than two years in the November-January period, increasing by a median annual rate of
2.5 percent .
The expected increase in pay growth is a major reason why the BoE said in February that it expected interest rates to rise faster and to a greater extent than they had thought a few months previously. The BoE is expected to keep rates on hold when it announces the outcome of its March policy meeting on Thursday. Earlier on Wednesday, the BBC reported that more than a million staff in England's National Health Service may receive pay increases of more than 6 percent over three years - something that would further add to overall wage growth. The ONS said the number of people in work grew by 168,000 in the three months to January. A Reuters poll of economists had pointed to a much smaller rise of 84,000. The data also showed the unemployment rate edged back down to its four-decade low of 4.3 percent after it rose briefly to 4.4 percent. The number of unemployment benefit claimants rose by 9,200 to 838,000 in February. The number of vacancies fell to 816,000 in the three months to February from 824,000 in the three months to January, marking the first drop in seven months. Economists taking part in the Reuters poll had expected the number of benefit claimants to rise by 5,400. Separate ONS figures showed Britain's government recorded a February budget deficit of 1.3 billion pounds, slightly more than the Reuters poll consensus of 1.1 billion pounds. That took the deficit in the first 11 months of the current financial year to 41.4 billion pounds, down 5.7 percent from the same point a year ago. Last week, Britain's official budget forecasters cut their projection for the full 2017/18 financial year shortfall to 45.2 billion pounds, or 2.2 percent of GDP, the lowest since 2001/02.
(Editing by Larry King)