UK Unemployment Rises to 5.2% as Wage Growth Slows, Strengthening Bets on Rate Cuts to 3.25% This Year

London | EcoPulse24

Market bets on further interest rate cuts in the UK have accelerated after unemployment reached its highest level since the pandemic, coinciding with wage growth slowing to its lowest in more than five years. This supports the view that inflationary pressures in the labor market are easing, allowing the Bank of England to move toward further monetary easing.

Data from the Office for National Statistics showed the unemployment rate rose to 5.2% in the last quarter of the year, the highest since early 2021 and above economists’ forecasts of 5.1%. Outside the pandemic, this is the highest since 2015. Meanwhile, regular private sector wage growth - the Bank’s preferred indicator - slowed to 3.4%, the lowest since November 2020 and near the 3.25% level considered consistent with 2% inflation. Overall wage growth excluding bonuses slowed to 4.2%.

Key Labor Market Figures:

• Unemployment rate: 5.2%
• Analysts’ expectations: 5.1%
• Regular private sector wage growth: 3.4%
• Level consistent with 2% inflation: 3.25%
• Wage growth excluding bonuses: 4.2%

Tax data showed payroll employment dropped by 11,000 in January, bringing the annual decline to 134,000. The December drop was revised from 43,000 to just 6,000, indicating less severe employment weakness than previously thought. Vacancies rose by 2,000 to 726,000 over the three months to January.

Employment and Vacancies:

• Payroll drop in January: 11,000
• Total annual decline: 134,000
• December revision: from 43,000 to 6,000
• Job vacancies: 726,000 (+2,000)

On monetary policy, the Bank of England’s Monetary Policy Committee kept the rate at 3.75% by a narrow 5-4 vote this month, with Governor Andrew Bailey casting the deciding vote against a further cut. Markets currently price in two quarter-point cuts by year-end, implying a base rate of 3.25%, the lowest in the current easing cycle. The probability of a 25bps cut next month has risen to about 80% from around 70% the previous day, with an April cut seen as nearly certain.

Monetary Policy and Market Pricing:

• Current interest rate: 3.75%
• Two cuts expected this year: 50bps
• Implied target rate: 3.25%
• Chance of cut next month: ~80%
• April cut: near-certain

The pound fell against the dollar, down over 0.5% to $1.3553, with another reading showing a 0.4% drop to $1.3579, the lowest since 6 February, reflecting the currency’s response to rising easing expectations.

Currency:

• Pound vs dollar: 1.3553 (-0.5%)
• Alternate reading: 1.3579 (-0.4%)

The Bank of England warned in its latest forecasts that unemployment could reach 5.3% by spring, and reduced its 2026 growth forecast to 0.9% from 1.2%. Last week’s data showed the economy grew by just 0.1% in Q4, below expectations.

Macroeconomic Outlook:

• Unemployment expected by spring: 5.3%
• 2026 growth forecast: 0.9% (from 1.2%)
• Q4 growth: 0.1%

The Bank’s governor voiced increased concern about weak demand and a widening labor market gap, while Deputy Governor Sarah Breeden said an additional cut could come by the end of April. In contrast, Chief Economist Huw Pill argued that current rates are low enough and should remain steady.

EcoPulse24 Analysis:
The data reflect a managed slowdown in the UK labor market, with wage momentum easing and more room for the Bank of England to loosen policy without reigniting inflation. Market pricing for two cuts this year signals a belief that wage-driven price pressures are fading, while overall growth remains weak. If upcoming inflation data confirms a drop from 3.4% to 3% as expected, the easing path will be reinforced, though the balance between supporting activity and price stability remains delicate.