U.K. Jobless Rate Rises to Near Five-Year High -- 3rd Update

By Ed Frankl

Unemployment in the U.K. rose to the highest level in nearly five years in the final quarter of last year, with wage growth also slowing, providing a further incentive for the Bank of England to cut its key rate next month.

The jobless rate was 5.2% in the three months through December, up from 5.1% in the three months through November, Britain's Office for National Statistics said Tuesday, the highest rate since January 2021. Annual wage growth, stripping out bonuses, was 4.2% in the quarter, down from a rise of 4.4% in September-November.

The data paints a picture of a cooling labor market in the U.K., which will likely help BOE policymakers feel more confident that they can cut interest rates. Lower wage growth eases cost pressures for businesses, which feeds into slower price rises across the economy, particularly in the labor-intensive services sector that dominates the British economy.

Unemployment, which excluding the pandemic period was last higher in 2015, has crept up from 4.4% a year ago, and a multidecade low of 3.6% in the summer of 2022. Wage growth was last lower in the three months through January 2022, the ONS said. Economists polled by The Wall Street Journal expected adjusted wage growth at 4.2% and the jobless rate at 5.1%.

Sterling fell against the dollar and euro and gilt yields declined after the publication of the jobs data, as investors raised bets on a rate cut in March. The BOE stood pat in a close vote at its most recent meeting earlier this month.

Policymakers will be reassured by further evidence of pay pressures easing and the labor market continuing to soften, Yael Selfin, chief economist at KPMG U.K., said in a note to clients.

"The bank may also want to minimize downside risks to the labor market and lower rates ahead of the next forecast meeting in April," she said.

The BOE this month raised its forecast for peak unemployment in mid-2026 to 5.3% from 5.1% it expected in November.

It also said it expects 3.25% as the pace of wage rises consistent with meeting its 2% inflation target over the medium term. A survey of businesses by the central bank's agents found the increase in pay settlements is expected to average 3.4% this year.

Policymakers expect the pace of inflation to fall to around 2% from April, with data due to be published Wednesday likely to record a drop in price rises in January.

"A further easing in wage growth is the main reason why we continue to forecast that the bank will cut interest rates from 3.75% now all the way to 3.0% this year," Capital Economics chief U.K. economist Paul Dales said in a note.

The BOE has warned that a more sustained rise in unemployment than it expects could push inflation below its target.

Labor-market confidence among consumers reached an eight-month low, according to an S&P Global sentiment index published Monday.

The jobs data tallies with weakness elsewhere in the economy. Gross domestic product grew 0.1% in the final quarter of last year, though economists expect some pickup at the start of 2026.

An early estimate of payrolled employees for January fell on month by 11,000, after 6,000 in December, the ONS said. The December figure was revised downward from an initial estimate of a 43,000 decline.

Businesses were hit by an increase in payroll taxes in 2025, and now face a rise in the minimum wage coming into force from April this year.

"Against this background it is unsurprising they are holding off hiring," Patrick Milnes, Head of People and Work Policy at the British Chambers of Commerce said.

Write to Ed Frankl at [e-mail]

(END) Dow Jones Newswires

02-17-26 0555ET