UK Labour Market Cools, Fuels Bank of England Rate Cut Expectations

The UK labour market continues to show signs of cooling, with the unemployment rate rising and wage growth slowing, increasing expectations that the Bank of England (BoE) may begin cutting interest rates as early as next month. Recent data indicates a weakening economic landscape, prompting investors to price in potential monetary policy adjustments.

Unemployment Rate Rises to Highest Level Since 2015

The UK unemployment rate increased to 5.2% in the fourth quarter of 2025, marking the highest level since the three months to October 2015, excluding the pandemic period [Reuters]. The Office for National Statistics (ONS) is currently overhauling the methodology used to calculate the unemployment rate following pandemic-era data collection challenges, but analysts note improvements in data quality in recent months.

Wage Growth Slows, Easing Inflationary Pressures

Growth in workers’ earnings has as well decelerated. Annual wage growth, excluding bonuses, slowed to 4.2% in the last three months of 2025 compared to the same period the previous year [Reuters]. This slowdown provides some relief from inflationary pressures, a key concern for the BoE.

Bank of England Monitoring Labour Market Closely

The Bank of England has been closely monitoring wage growth as an indicator of persistent inflation. Private sector annual wage growth, excluding bonuses – a metric particularly scrutinized by the BoE – slowed to 3.4% in the three months to December, down from 3.6% in the three months to November [Reuters]. Previously, Governor Andrew Bailey highlighted weak labour market data as a “substantial problem” [The Times].

Impact on Interest Rate Expectations

The weakening labour market data has significantly shifted market expectations regarding future interest rate movements. Investors are now almost fully pricing in two quarter-point interest rate cuts by the end of 2026, as concerns about inflation grant way to anxieties surrounding the broader economy [Reuters].

Data Quality Concerns Remain

Despite improvements, concerns persist regarding the quality of ONS labour market data. A decline in response rates to the ONS’s jobs market survey prompted criticism from politicians and the Bank of England. The ONS has increased spending and adjusted interviewing techniques to address this issue, but some analysts remain cautious about fully relying on the figures [The Times].

Recent Employment Trends

Estimates from Pay As You Earn Real Time Information (PAYE) show a decrease in the number of payrolled employees. Between November 2024 and November 2025, payrolled employees fell by 155,000 (0.5%), and decreased by 33,000 (0.1%) between October 2025 and November 2025 [ONS]. The early estimate for December 2025 showed a decrease of 184,000 (0.6%) year-on-year, reaching 30.2 million payrolled employees, though this figure is considered provisional and subject to revision [ONS].