Expectations of Bank of England rate cut rise as UK unemployment hits four-year high

UK unemployment rose in the three months through October as a softening labour market added to the Bank of England’s policy dilemma ahead of its final interest rate decision of the year.

The headline jobless rate edged up to 5.1% in the August-to-October period, from 5.0% in the three months through September, according to figures published by the Office for National Statistics on Tuesday.

The reading matched economists’ expectations and marked the highest level since 2021, when pandemic-related disruptions were still weighing heavily on employment.

The data reinforced evidence that hiring momentum is fading, even as inflation remains stubbornly above the central bank’s target.

Labour market cools as hiring slows

Unemployment has climbed steadily from 4.3% a year earlier, while the employment rate slipped to 74.9% from 75.2%, the ONS said.

Early estimates also pointed to a sharper fall in payrolls, with employee numbers dropping by 38,000 in November, compared with a decline of 22,000 in October.

The slowdown has been most pronounced among younger workers, with the ONS noting that rising unemployment and falling payroll numbers were concentrated in some younger age groups.

Vacancies, however, were broadly unchanged, suggesting firms remain cautious rather than aggressively cutting staff.

“There continues to be an overall picture of a weakening labour market,” said Liz McKeown, the ONS director of economic statistics.

Business surveys have echoed that assessment.

A report by KPMG and the Recruitment & Employment Confederation showed demand for staff continued to decline, though at a slower pace than earlier in the year, as uncertainty surrounding the government’s late-November budget announcement weighed on hiring decisions.

Wage growth eases, but public sector stands out

Wage pressures, a key concern for policymakers, showed further signs of easing in the private sector.

Annual growth in regular pay, excluding bonuses, slowed to 4.6%, from 4.7% previously.

That trend may provide some reassurance to rate-setters wary of domestically driven inflation.

However, the headline figures masked a sharp divergence between sectors.

Public sector wages rose by an annual 7.6% in the August-to-October period, nearly twice the 3.9% pace recorded in the private sector.

The ONS said the gap partly reflected timing effects, with some public sector pay awards being implemented earlier this year than in 2024, creating a base effect.

McKeown said wage growth had slowed further in the private sector while accelerating again in the public sector due to the earlier timing of pay rises.

Rate cut expectations grow as labour market cools ahead of BoE meeting

The latest labour market data landed days before the Bank of England’s policy meeting, where policymakers are divided over whether to cut interest rates.

At its previous meeting, the Monetary Policy Committee voted narrowly to hold rates, with a 5-4 split.

With unemployment at its highest level in nearly four years and wage growth easing sharply, financial markets are increasingly confident the Bank of England will cut interest rates at its final meeting of the year.

Investors expect a 25 basis point reduction, taking the benchmark rate from 4% to 3.75%.

Richard Carter, head of fixed interest research at Quilter Cheviot, said the jobs figures strengthened the case for easing.

“At November’s meeting, the MPC was split almost down the middle, and Andrew Bailey’s deciding vote saw rates held. However, with the economy shrinking - largely thanks to the recent budget and its impact on consumer confidence, spending and business planning - and the outlook for growth rather bleak, a cut is seeming more likely this time around," he said.

ING economist James Smith also expects a reduction on Thursday, followed by two further cuts in the first half of 2026 as wage growth slows and the jobs market cools.

Philip Shaw of Investec said private-sector pay growth, a key gauge for the Bank, has eased further, signalling that longer-term inflation pressures are becoming more subdued and making a December rate cut increasingly likely.