Key Takeaways
- The Office for National Statistics reported a rise in the unemployment rate, a fall in payrolled employees and a fall in wage growth.
- Morningstar’s international economist thinks the Bank of England will be able to cut rates further than markets are currently pricing.
- And the probability of a rate cut in March by the Bank of England has increased.
The UK unemployment rate hit a post-pandemic high of 5.2% in the final quarter of 2025, fresh data from the Office for National Statistics showed, increasing the odds of a rate cut by the Bank of England in March.
The ONS said that the UK unemployment rate for people aged 16 and over rose from 5.1% in the third quarter of 2025 and markets had expected unemployment to remain steady at this level. The latest rate is just below the 5.3% unemployment figure recorded in the final quarter of 2020 at the height of the covid crisis.
In the final three months of last year, the ONS said the number of payrolled employees fell by 130,000—a 0.4% decrease on the final quarter of 2024, and by 46,000 over the final quarter of 2025. This was a 0.2% decrease on the previous quarter.
Annual growth in average employee earnings was 4.2% for both regular earnings excluding bonuses, and total earnings including bonuses in October to December 2025, the ONS said. On both measures this was a fall on previous periods.
How UK Job Numbers Could Influence BoE Rate Decisions
“The labor market continues its weakening trajectory, with today’s labor force data confirming that the unemployment continues to trend higher, up 0.1% in December to a five-year high of 5.2%. Wage pressures—while still elevated—also eased further in December,” says Morningstar international economist Grant Slade.
“Our view that UK price growth will largely normalize in the second half of 2026 remains unchanged. We think this should allow the BoE to deliver greater monetary easing in 2026 than the one to two 25 basis point cuts to the bank rate that are currently priced in by the UK money market.”
The pound fell against USD on the news. Fresh from another record close on Monday evening, the FTSE 100 appeared to shrug off the data, rising at the open to head above 10,500 points.
Rising Unemployment Shifts Outlook for Bank of England Policy
In the wake of the data, futures markets increased their estimate of the likelihood of a March rate cut by the Bank of England to 82.9%—from 72.9% at the end of last week. The chance of a second rate cut in June has increased to 39.7% from 35.6%, though some economists expect more cuts than that.
Though the figures came as an unexpected development for markets, the Bank of England had previously said higher-than-expected unemployment was a possibility. Unlike the US Federal Reserve, the Bank’s mandate does not include achieving maximum employment within the real economy, but its policymakers remain focused on the labor market as a bellwether for the health of the economy and as a potential justification for stimulus in the form of rate cuts.
The UK economy recently posted underwhelming gross domestic product growth of 0.1% for the final quarter of 2025.
In its February monetary policy report, the Bank’s members said that labor market weakness might cause the Consumer Prices Index to “undershoot” the Bank’s 2% target in 2026.
“Households might remain cautious about spending, with a risk that the saving rate would not fall back as expected. Demand could remain weak and unemployment could increase by more than expected,” the Bank said on. Feb. 5.
January inflation data is due on Feb. 18, which is expected to show a softening in inflation from 3.4% to 3%.
The Bank of England forecasts inflation to fall to 2% in April 2026.
The Role of AI in Boosting UK Business Efficiency
The government will be alive to the effect of rising unemployment on the economy and the potential consequences for the prime minister’s economic growth plans. The data will also be received as evidence of the effect of higher taxation on businesses—and in particular the increase to employer National Insurance contributions announced at the 2024 Autumn Budget and launched in April last year.
As markets reprice the cost of progress in artificial intelligence, they also raise questions about job security in the longer term.
“Businesses have been crystal clear that government policies which increased labor costs resulted in them pressing pause on their hiring plans, and potentially sped up another change which could have a huge impact on job creation in the years ahead,” says AJ Bell head of financial analysis, Danni Hewson.
“Weaving AI into businesses to increase productivity is a positive move and may be the answer to a decades-old issue. But for young people in particular, already struggling to get their first taste of work, AI could result in a scarcity of entry level posts,” she adds.
