UK Unemployment Rises to 5.2 Percent, Strengthening Case for Bank of England Rate Cut

Britain’s unemployment rate has climbed to its highest level in more than a decade outside the pandemic period, adding momentum to expectations that the Bank of England could lower interest rates as soon as March. Fresh labour market data show the jobless rate rose to 5.2 percent in the three months to December 2025, up from 5.1 percent in the previous three month period.

The increase marks the highest level recorded since 2015 when excluding the temporary spike seen during the Covid crisis. While the rise is modest, it reflects a gradual cooling in the labour market that policymakers have been closely monitoring. The Office for National Statistics, which is continuing improvements to its labour force survey following pandemic related disruptions, said response rates and data reliability have stabilised in recent months.

Wage growth also slowed, offering further signs that inflation pressures from the jobs market may be easing. Annual pay growth excluding bonuses came in at 4.2 percent in the final quarter of 2025, down from 4.4 percent in the three months to November. Private sector wage growth, a key indicator for the central bank, eased to 3.4 percent from 3.6 percent previously.

The Bank of England has been assessing whether wage pressures remain strong enough to keep inflation elevated. With consumer price growth still above the two percent target, officials have maintained a cautious stance. However, the combination of rising unemployment and softer wage gains has strengthened market expectations that monetary policy could be loosened soon.

Financial markets reacted swiftly to the data. Sterling slipped against the dollar in early trading before recovering part of its losses later in the session. Investors are now pricing in roughly an 80 percent probability of a quarter point rate cut at the Bank’s March meeting, compared with lower expectations just a day earlier.

Business groups have linked the weakening labour market to policy changes introduced over the past year. The government increased employer payroll taxes last April, a move designed to support public finances but one that raised operating costs for companies. Employers are also preparing for another rise in the minimum wage scheduled for April, alongside reforms aimed at strengthening worker protections.

Recent surveys suggest that cost pressures are beginning to influence hiring decisions. More than a third of employers reported plans to reduce recruitment of permanent staff in response to higher labour expenses. Some firms have also signalled caution around expanding payrolls until there is greater clarity on economic conditions.

Despite the overall slowdown, there are tentative signs that parts of the labour market may be stabilising. Vacancies have stopped falling at the pace seen earlier in the year, and some sectors continue to report skill shortages. Policymakers will weigh these mixed signals carefully as they consider the timing of any shift in interest rates.