UK labour market cools as unemployment hits five-year high

​​​What the latest UK labour market data shows

​The UK labour market took another step backwards in the latest Office for National Statistics (ONS) release, with unemployment climbing to 5.2% in the three months to December 2025. That marks the highest reading since 2021 and continues a trend that has been building since the middle of last year.

​Average weekly earnings rose 4.2% over the same period, coming in below market expectations and down from earlier readings. While wages are still growing in nominal terms, the pace of gains is clearly fading. For the Bank of England (BoE), that distinction matters.

​The number of payrolled employees fell by 11,000 in January according to HMRC data, marking a fifth consecutive monthly decline. Over the past year, payrolled employees have dropped by 134,000. Whichever way you slice it, hiring has stalled.

​Private sector pay growth hits weakest level in five years

​Perhaps the most significant detail for rate-setters is the decline in private sector regular pay growth, which eased to 3.4% year-on-year (YoY). That is the weakest reading in five years and offers further evidence that inflationary pressures from the jobs market are moderating.

​This matters because the BoE has repeatedly pointed to wage growth as a key factor in its interest rate decisions. When pay is rising quickly, it feeds into services inflation and makes the Monetary Policy Committee (MPC) uncomfortable about cutting rates too quickly.

​A reading of 3.4% is getting closer to a level that the Bank would consider consistent with its 2% inflation target. It is not quite there yet, but the direction is unmistakable. This is a labour market that is adjusting to the reality of higher employment costs, particularly after the national insurance increase.

​It is worth remembering that the national living wage increase for 2026, while welcome for workers, has added to the cost burden for employers. The result is predictable: businesses are holding back on hiring and, in some cases, actively reducing headcount.

​Vacancies and redundancies paint a sobering picture

​Total job vacancies fell 9.2% year-on-year, with the ratio of unemployed people to each vacancy rising to 2.6. That is a far cry from the extremely tight labour market of 2022, when vacancies outnumbered the unemployed. The balance of power has shifted firmly back towards employers.

​Redundancies have edged higher too, reaching 4.9 per 1000 employees. While that is not at crisis levels, the trend is moving in the wrong direction. Potential redundancy notifications have been climbing across several industries, suggesting more job losses may follow.

​For those looking to understand what is driving these numbers, the employer national insurance increase is a significant factor. Businesses facing higher labour costs have responded by cutting back on new hires and, in some cases, reducing existing headcount.

​Pound drops as rate cut expectations build

​Sterling took a hit following the data release, falling below $1.36 against the US dollar and losing around 0.5% on the day. The move reflects the market's growing conviction that the BoE will need to cut rates sooner and more aggressively than previously expected.

​Traders are now fully pricing in two quarter-point rate cuts by November, with a high probability attached to an April move. Some economists, including those at Pantheon Macroeconomics, argue the deterioration in the jobs market could even bring a March cut into play.

​For forex traders, the reaction was swift but not dramatic. The British pound had already been under pressure following last week's disappointing fourth quarter (Q4) gross domestic product (GDP) print, which showed growth of just 0.1%. Today's labour data reinforced the narrative of an economy struggling to gain traction.

​UK gilt yields fell across the curve, outperforming their European counterparts as bond markets adjusted to the shifting policy outlook. Lower yields reflect the expectation that borrowing costs will come down, which in turn supports the case for spread betting and CFD trading on fixed income markets.

​FTSE 100 shrugs off weak data

​In a pattern that has become familiar, the FTSE 100 managed to push higher despite the gloomy domestic data, rising around 0.3% in morning trade. The index continues to benefit from its heavy weighting towards overseas earners, who gain when the pound weakens.

​A softer sterling boosts the translated earnings of FTSE multinationals, particularly in sectors like mining, pharmaceuticals and consumer staples. With around 80% of FTSE 100 revenues generated abroad, a weaker pound is often a net positive for the index even when the domestic economy is struggling.

​That said, not every stock benefited. Antofagasta slipped despite reporting strong full-year results, with the decline attributed to valuation concerns and a pullback in copper prices. Sometimes a good set of numbers is not enough when expectations are already elevated.

​On the positive side, SSP Group gained ground on an encouraging trading update, while Applied Nutrition advanced with broker support providing a tailwind. For traders watching individual shares, today's movers offered opportunities on both sides of the ledger.

​What this means for the Bank of England

​The MPC now faces a familiar dilemma, but one that is becoming easier to resolve. Inflation remains above target, but the labour market is clearly cooling. Wage growth is moderating. The economy barely grew in the final quarter of 2025. At some point, the balance of risks tips decisively towards cutting.

​The February meeting saw the Bank hold rates at 3.75% in a narrow 5 - 4 vote, with four members preferring an immediate cut. Today's data will strengthen the hand of the doves on the committee and make it harder for the hawks to resist for much longer.

​Markets are doing the Bank's work for it in some respects. Lower gilt yields and a weaker pound are already loosening financial conditions. But the MPC will want to see confirmation that the labour market softening is feeding through to lower services inflation before committing to a sustained easing cycle.

​For traders, the key question is timing. An April cut looks increasingly likely, with a second reduction expected before year-end. Those looking to position around Bank of England decisions can do so through our trading platform, which offers access to forex, indices and fixed income markets.