U.K. Unemployment Ticks Higher as Wage Growth Cools, Reinforcing Rate-Cut Expectations

The U.K. labor market showed further signs of cooling in December, with unemployment edging higher and wage growth easing, strengthening the case for additional interest rate cuts by the Bank of England in the coming months.

Data released Tuesday by the Office for National Statistics (ONS) showed that the unemployment rate rose to 5.2% in the three months to December, up from 5.1% previously and marking its highest level since early 2021. The increase points to a gradual softening in labor market conditions amid slowing economic momentum.

At the same time, wage pressures continued to ease. Annual pay growth across the economy, excluding bonuses, slowed to 4.2% over the same period, down sharply from 4.5% in the previous reading. The deceleration in earnings growth suggests that inflationary pressures linked to wages are continuing to moderate.

Taken together, the data reinforce expectations that the Bank of England will face growing pressure to loosen monetary policy further, as a cooling labor market and softer wage dynamics reduce the risk of persistent domestic inflation. Markets are increasingly pricing in the possibility of an interest rate cut as early as next month.