UK unemployment has risen to its highest level in five years, while wage growth continued to ease, reinforcing expectations that the Bank of England may resume cutting interest rates in the coming months.
Data from the Office for National Statistics (ONS) show the jobless rate climbed to 5.2 per cent in the three months to December, up from 5.1 per cent in the previous quarter. The figures reflect a gradual cooling of the labour market that has been underway since 2022.
Average earnings excluding bonuses rose 4.2 per cent year-on-year, down from 4.5 per cent in November and broadly in line with economists’ forecasts. Analysts said slower pay growth, combined with rising labour costs, is affecting hiring decisions, particularly at entry-level roles.
Younger workers have been hit hardest. Payroll data indicate employment among people aged 34 and under has fallen by 242,000 since mid-2024, when overall payroll numbers peaked. By contrast, employment for those aged 35 and over has grown by 71,000.
Martin Beck, chief economist at WPI Strategy, said the higher cost of labour was weighing on junior hiring. He added that rapid adoption of artificial intelligence could be influencing employers’ decisions to reassess entry-level roles.
The softening labour market has strengthened bets that the Bank of England will reduce interest rates from the current 3.75 per cent. Bloomberg data show a roughly 76 per cent probability of a rate cut at the March monetary policy meeting.
Paul Dales, chief UK economist at Capital Economics, said the latest figures suggest policymakers could have “at least a couple more interest rate cuts in their locker.” KPMG chief economist Yael Selfin noted that the data would reassure the Bank that wage pressures are easing, allowing the monetary policy committee to consider loosening policy if inflation continues to moderate.
Wednesday’s inflation figures will be closely watched, with forecasts suggesting the consumer prices index could fall to 3 per cent in January from 3.4 per cent in December, supported by lower airfares, easing food costs, and slower energy inflation. This would mark the lowest CPI reading since March 2025.
Government ministers emphasised the broader economic context. Health minister Stephen Kinnock pointed to strong economic growth and ongoing job creation, noting initiatives to support apprenticeships and employment opportunities.
However, business groups warned that employment reforms and higher hiring costs are constraining the labour market. Alex Hall-Chen of the Institute of Directors said unemployment at 5.2 per cent highlighted the fragility of jobs, calling for adjustments to make hiring less risky for businesses.
Jonathan Moyes, head of investment research at Wealth Club, said the combination of slowing wage growth and weaker employment strengthens the case for further rate easing. He said the labour market is losing momentum, signalling a shift in the balance of risks towards supporting growth rather than curbing inflation.
