UK unemployment has risen to 5.2%, its highest level in five years, as a broad deterioration in labour market conditions strengthens the case for an interest rate cut at the Bank of England's March meeting.
The Office for National Statistics data, released today, showed the number of payrolled employees fell by 130,000 in 2025 compared to the previous year, with early estimates suggesting headcount reductions continued into January 2026. Vacancies edged lower and redundancies ticked up, completing a picture of an economy where hiring has stalled.
The more significant development for markets may be the slowdown in wage growth. Private sector regular earnings rose 3.4% year-on-year in the three months to December, close to the 3.25% the Bank of England has indicated is consistent with hitting its 2% inflation target. Gilts rallied and sterling weakened this morning as investors increased their bets on a March cut.
Adam Hoyes, senior asset allocation analyst at Rathbones, said: "The UK labour market data released today shows clearer signs of a weakening labour market feeding through to slower pay growth, which will give the Bank of England more confidence in cutting interest rates over the course of this year."
The weakness is partly a legacy of October's Budget. Jonathan Raymond, investment manager at Quilter Cheviot, noted that, following a November where hiring plans were put on hold, "things are yet to get going again, potentially highlighting the longer-term impacts of increased costs that businesses have faced."
Increased minimum wage costs, higher national insurance contributions and concerns around the Employment Rights Act all continue to weigh on the data, he said.
Yet the wages picture is uneven. Public sector pay rose 7.2% year-on-year in the three months to December, while workers in retail, hotels and restaurants saw a 5.1% increase – both well above the private sector average. April's minimum wage rise of between 4.1% and 8.5% will keep pay growth elevated in labour-intensive sectors for some time, adding to input cost pressures.
Hoyes cautioned against reading the data as a green light for aggressive easing. "The UK inflation genie is mostly back in the bottle, but the lid might not be closed yet," he said.
Luke Bartholomew, deputy chief economist at Aberdeen, was more direct on the rate outlook. With private sector pay growth having "essentially returned to an inflation-target consistent rate," he argued there is now a clear case for a cut in March and expects rates to fall to 3% by the end of the year. Inflation data due tomorrow could complicate that picture, he added.
Whether the labour market stabilises from here remains uncertain. A fractional uptick in vacancy numbers in the three months to January offers limited reassurance, and without a recovery in business or consumer confidence, Raymond cautioned that "the jobs market may remain uncertain for a while longer."