UK Unemployment Rises to 5% as Wage Growth Slows, Boosting Rate Cut Hopes
The UK unemployment rate rose in September, according to official data released on Tuesday, while wage growth showed early signs of slowing. The softer data could give the Bank of England (BoE) room to cut interest rates at its final policy meeting of the year in December.
Jobless Rate Climbs More Than Expected
Figures from the Office for National Statistics (ONS) showed that unemployment increased to 5.0% in the three months to September — higher than the 4.8% recorded previously and above market expectations.
Meanwhile, annual pay growth excluding bonuses eased slightly to 4.6% over the same period, compared with 4.7% in August.
The BoE has been monitoring the jobs market closely, worried that strong wage gains could keep inflation above its medium-term target despite signs of cooling demand.
Inflation Still Above Target but Wage Pressures Easing
The UK consumer price index (CPI) came in at 3.8% in September — nearly double the central bank’s 2% target. However, the slowdown in earnings growth could help temper inflation pressures heading into 2026.
A new survey by the Chartered Institute of Personnel and Development (CIPD) showed that British employers expect to raise wages by just 3% on average over the next 12 months, as businesses grow cautious amid tax policy uncertainty.
Hiring plans have also weakened, with overall employment intentions now at their lowest since the pandemic, especially in the public sector.
Tax Policy Concerns Add to Economic Uncertainty
In a recent speech, Chancellor Rachel Reeves warned that the upcoming November 26 budget would be “difficult,” hinting that the Labour government may reconsider its earlier pledge not to raise income tax, national insurance, or value-added tax.
Reeves said that maintaining those commitments would require “significant spending cuts,” particularly in infrastructure and public investment programs.
Markets Eye December Rate Cut
The Bank of England kept its benchmark interest rate unchanged last week, though four of nine policymakers voted in favor of a 25-basis-point cut to 3.75%.
Analysts at ING said they believe markets are underestimating the likelihood of a December cut. “We still think the chances of a 25bp rate cut next month are underpriced,” they noted, estimating a 60% probability of such a move.
