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UK wage growth slowed in late 2025 as the unemployment rate rose to 5.2 percent, raising the prospect of a near-term cut in the Bank of England’s key rate as officials respond to a cooling labor market.
According to the Office for National Statistics, the unemployment rate reached 5.2 percent in the three months to December, its highest level in five years, compared with 5.1 percent in the previous three-month period.
The ONS said on Tuesday that annual growth in average weekly wages, excluding bonuses, slowed to 4.2 per cent in the last three months of the year, down from a revised 4.4 per cent in the three months to November.
Private sector wage growth slowed to 3.4 percent, bringing it closer to the 3.25 percent rate that the BOE considers in line with its 2 percent inflation target.
The BoE is keeping a close eye on the slowdown in Britain’s jobs market as it anticipates the next time it will lower interest rates. Some investors are counting on a quarterly rate cut to 3.5 percent soon after the BOE’s March meeting as wage growth moderates along with a decline in inflation.
The pound weakened as traders feared a further rate cut. It was down 0.4 percent against the dollar at $1.358. After the data, swaps traders raised the odds of a quarter-point cut next month to 80 percent from 70 percent.
“With unemployment rising and payrolls falling again, this is another soft labor market report,” said Luke Bartholomew, deputy chief economist at Aberdeen asset manager.
“At the moment it seems there is a clear case for a further rate cut at the Bank’s next meeting in March, and we 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. However, some executives are concerned about job losses, and think it is only a matter of time before wage growth weakens further.
The MPC kept rates at 3.75 percent in a knife-edge vote at its latest meeting this month, leaving the door open to a cut soon after its next decision on March 19.
Data based on tax records shows the number of salaried workers in the UK fell by 6,000 between November and December, bringing employment down by 121,000 or 0.4 per cent compared to the previous year.
Provisional data for January showed a month-on-month decline of 11,000, although those figures will likely be revised down. The UK economy grew just 0.1 per cent in the last quarter, official figures showed last week, confirming a gloomy picture.
Conservative Shadow Chancellor Mel Stride said, “Higher taxes, including the jobs tax, rising business rates and anti-business red tape that increase risk (are) making it harder to employ people.”
The report shows youth unemployment rose to 16.1 percent, the highest in more than a decade, including a rise during the pandemic. Economists warned that the increase is a sign that higher payroll costs, partly due to increased employer national insurance contributions and weaker confidence, are leading employers to hesitate in employing younger workers.
He said raising the minimum wage could also disincentivize young people from hiring. “There are signs that young workers in particular are being pushed out of the market,” said Peter Dixon of the National Institute for Economic and Social Research.
“This makes it harder for young workers to take that first significant step on the career ladder,” said Jack Kennedy, economist at jobs site Indeed. “This isn’t just a short-term problem. Delaying career starts can have lasting impacts on earnings and progression.”
ONS data shows job vacancies fell by 736,000 in the three months to December from 726,000 in January, another sign of weak labor demand.
James Smith, developed markets economist at ING, said 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 is highly likely,” he said.
“We expect another cut in June, and we do not rule out the Bank lowering rates even further.”
Additional reporting by Ian Smith in London
