The Job Market Is Wobbling — And the Bank of England Is Watching
The UK jobs market just flashed another amber light. Unemployment climbed to 5.2% between October and December — the highest rate since early 2021 — according to the Office for National Statistics (ONS). That’s not a full-blown alarm, but it’s enough to raise eyebrows. Payrolls shed 46,000 workers last quarter, with an estimated 11,000 more jobs lost in January. Meanwhile, wage growth is cooling. Put it all together, and suddenly a Bank of England rate cut in March looks a lot more likely.
What’s Driving the Rise in UK Unemployment?
It’s not one single villain, it’s a pile-on. Businesses are absorbing higher costs from the government’s payroll tax hike and an increased minimum wage, and many are already pulling back on hiring as a result.
Then there’s the Employment Rights Act looming on the horizon. A recent survey found that a third of firms plan to reduce hiring because of it. When the cost and complexity of taking someone on goes up, employers simply… don’t.
As Liz McKeown, director of economic statistics at the ONS, put it: payroll numbers fell “reflecting weak hiring activity.” Jonathan Raymond at Quilter Cheviot was blunter — the labour market is “showing signs of creaking when economic growth is difficult to come by.”
Wage Growth: Slowing Faster Than Expected
Here’s the nuance that matters. Wages are still growing — just less quickly.
Average earnings including bonuses slowed to 4.2% in Q4, down from 4.6% the quarter before. Strip out bonuses, and it’s also 4.2% — a touch lower than the previous 4.4%, but broadly in line with what City economists expected.
The more telling detail? Private sector wage growth hit its lowest rate in five years, while public sector pay remains elevated as last year’s pay deals continue to filter through. That divergence is something the Bank of England will be watching closely.
Rate Cut in March? The Odds Are Shortening
This is where things get interesting for borrowers and investors alike.
Yael Selfin, chief economist at KPMG UK, said the data “raises the prospect” of a March rate cut, noting that the Monetary Policy Committee (MPC) will be “reassured by further evidence of pay pressures easing.” Paul Dales at Capital Economics agrees, pointing to the “lack of green shoots of recovery” in the jobs market as a signal that the Bank of England has “at least a couple more interest rate cuts in its locker.”
The pound dipped 0.3% against the dollar after the figures dropped — markets doing what markets do when they smell cheaper borrowing on the horizon.
The Bottom Line
The UK labour market is softening, wages are growing more slowly, and the pressure is building on the Bank of England to cut rates sooner rather than later. March is back on the table. Whether that translates into relief for households and businesses will depend on how quickly rate reductions feed through — and whether hiring picks back up once firms adjust to their higher cost base.
Keep an eye on the next ONS release and the Bank’s February forecast meeting for the next piece of the puzzle.
FAQ
Q1: Why has UK unemployment risen to a post-pandemic high?
A: A combination of rising employer costs — including higher payroll taxes and a minimum wage increase — has dampened hiring. Uncertainty around the Employment Rights Act has also made firms more cautious about taking on new staff.
Q2: What does slower wage growth mean for the Bank of England?
A: Easing pay pressures reduce the risk of inflation being kept high by rising wages, giving the MPC more room to cut interest rates without stoking a price spiral.
Q3: Is a Bank of England rate cut in March 2025 likely?
A: It’s looking increasingly plausible. Several economists, including those at KPMG UK and Capital Economics, say the latest jobs data strengthens the case for a March cut — and the pound’s drop after the release suggests markets agree.
Q4: How does the Employment Rights Act affect hiring?
A: A recent survey found a third of UK businesses plan to reduce hiring as a result of the Act’s measures, which raise the complexity and cost of employment — making firms more reluctant to take on new workers in an already uncertain environment.
Q5: What’s the difference between private and public sector wage growth?
A: Private sector pay growth is at a five-year low, reflecting tighter business conditions. Public sector wages remain higher as last year’s pay awards continue to filter through — a gap the Bank of England is monitoring carefully.
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Effective Date: 15th July 2025
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