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UK wage growth slowed at the end of 2025 as the jobless rate increased to 5.2 per cent, raising the prospects of a near-term reduction in the Bank of England’s key rate as officials respond to a cooling labour market.
The unemployment rate hit 5.2 per cent in the three months to December, its highest level in five years, compared with 5.1 per cent over the previous three-month period, according to the Office for National Statistics.
Annual growth in average weekly wages, excluding bonuses, slowed to 4.2 per cent in the last three months of the year, the ONS said on Tuesday, down from a revised 4.4 per cent in the three months to November.
Private sector wage growth eased to 3.4 per cent, bringing it closer to the 3.25 per cent rate that the BoE thinks is consistent with its 2 per cent inflation target.
The BoE is watching the slowdown in the UK jobs market closely as it gauges when next to lower its interest rates. Some investors are banking on a quarter-point rate reduction to 3.5 per cent as soon as the BoE’s March meeting as wage growth softens alongside falling inflation.
The pound weakened as traders anticipated a rising probability of rate cuts. It was down 0.4 per cent against the dollar at $1.358. Following the data, swaps traders moved to push up the chance of a quarter-point cut next month from 70 per cent to 80 per cent.
“With unemployment ticking up and payrolls declining again, this is yet another soft labour market report,” said Luke Bartholomew, deputy chief economist at Aberdeen, the asset manager.
“For now it seems there is a clear case for a further rate cut at the Bank’s next meeting in March, and we continue to expect rates to fall to 3 per cent later this year.”
An extended period of strong wage growth has provoked persistent concerns within the BoE’s Monetary Policy Committee about inflationary pressures. Some officials are increasingly concerned about job losses, however, and think it is only a matter of time before wage growth weakens further.
The MPC held rates at 3.75 per cent in a knife-edge vote in its latest meeting this month, leaving the door open to a reduction as soon as its next decision on March 19.
Data based on tax records showed the number of payrolled employees in the UK fell by 6,000 between November and December, leaving employment down by 121,000, or 0.4 per cent, over the past year.
Provisional figures for January revealed a month-on-month decline of 11,000, although those figures will probably be revised. The UK economy grew by just 0.1 per cent in the final quarter, official figures showed last week, confirming the lacklustre picture.
“Higher taxes, including a tax on jobs, soaring business rates, and anti-business red tape that piles on risk [are] making it harder to employ people,” said Mel Stride, the Conservative shadow chancellor.
Youth unemployment rose to 16.1 per cent, the highest in more than a decade, including the spike during the pandemic, the report showed. Economists warned the rise was a sign that higher payroll costs, driven in part by the increase in employer national insurance contributions, and fragile confidence, were prompting employers to hesitate employing younger workers.
Raising the minimum wage might also be disincentivising the hiring of young people, they added. “There are indications that younger workers in particular are being priced out of the market,” said Peter Dixon at the National Institute for Economic and Social Research.
“This makes it harder for younger workers to get that crucial first foot on the career ladder,” added Jack Kennedy, an economist at jobs site Indeed. “This isn’t just a short-term problem. Delayed career starts can have lasting effects on earnings and progression.”
Job vacancies fell from 736,000 in the three months to December to 726,000 in January, a further sign of weakening labour demand, the ONS data showed.
James Smith, developed markets economist at ING, added that the data keeps the Bank of England firmly on track for a March rate cut. “Barring any surprises in next month’s data — or with inflation tomorrow — a March rate cut looks highly likely,” he said.
“We expect another cut in June, and we don’t rule out the Bank taking rates even lower.”
Additional reporting by Ian Smith in London
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