The supermarket group, one of the country's largest private sector employers, said a deal agreed with shopworkers union USDAW will see store workers get 11.02 pounds ($13.25) an hour from April 2, up from 10.30 pounds currently.

Workers in inner and outer London will get additional allowances.

Tesco (TSCO.L) said the increase, a third in ten months, will cost it over 230 million pounds and take investment in pay over the last year to 430 million pounds.

On Friday, Asda, Britain's No. 3 supermarket chain, announced a 10% pay rise for its staff. No. 2 Sainsbury's (SBRY.L) announced an increase in January.

The BoE is watching pay settlements closely as it mulls further rises in interest rates.

BoE Governor Andrew Bailey earlier this month expressed concerns about wage-setting, despite signs that the surge in inflation - which hit 11.1% in October before falling to 10.1% in January - had turned a corner.

Tesco said the latest rise reflects the accelerating cost of living its workers are facing.

But it also likely reflects Britain's still tight labour market. Data this month showed that despite being on the brink of recession, the country's jobless rate held close to five-decade lows and employment grew.

The government-mandated National Living Wage will rise to 10.42 pounds an hour from April, an increase of 9.7%.

Tesco said it will also continue to provide staff with free food in store canteens, a salary advance scheme and a discount of up to 1,500 pounds a year off their shopping.

Premiums for Sunday working will, however, be cut from 25% to 17%.

Shares in Tesco, up 12% so far this year, were unchanged in afternoon trading.

($1 = 0.8315 pounds)