UK unemployment rises to highest level in years while pay growth slows, boosting rate-cut bets.

UK labor market data released on Tuesday came in weaker than expected, disappointing markets but strengthening investor expectations for an interest rate cut as early as next month.

The unemployment rate in the three months to the end of 2025 rose to 5.2%, up from 5.1% in the previous period, marking its highest level in over a decade outside the pandemic spike, when the jobless rate briefly reached 5.3%.

The report also revealed a notable slowdown in wage growth. Average earnings increased by 4.2% in the three months to December, down sharply from 4.6% previously and falling short of the 4.6% forecast.

Meanwhile, jobless claims surged to 28.6K in January from 2.7K in the prior month, significantly exceeding the 22.8K consensus estimate.

UK employers have largely attributed the weaker labor data to policy changes introduced by Prime Minister Keir Starmer’s government, including last year’s tax increases for businesses. The soft figures have reinforced economists’ expectations that the Bank of England could move toward a rate cut at its March policy meeting.

The marked deceleration in wage growth also points to easing inflationary pressures from the labor market, further supporting the case for monetary policy easing in the near term.