UK unemployment rose to 5.2% in the three months to December 2025 as the impact of Labour’s economic policies hit the jobs market.
The last quarter of 2025 saw UK economic activity flatline as businesses reacted to the uncertainty around the budget and associated tax increases. We now know this led to slower wage growth and higher unemployment.
“UK unemployment has climbed to 5.2%, its highest level in nearly five years, while private-sector wage growth slowed to 3.4% which is the weakest pace since 2020,” said Lale Akoner, global market analyst at eToro.
“It is clear the UK labour market is cooling and inflation pressures from wages are fading.”
Wage inflation is one of the key indicators cited by the Bank of England as a reason to be cautious around interest rate cuts. Nowthat wage growth is slowing alongside rising unemployment, the BoE will have no excuse not to cut interest rates at the upcoming meeting in March.
“And crucially, from the perspective of the Bank of England and the outlook for inflation, this weakness is continuing to pull down on wage growth,” explained Luke Bartholomew, Deputy Chief Economist, at Abderdeen.
“Private sector pay growth in particular has essentially returned to an inflation-target consistent rate, meaning that as and when inflation falls to 2% later this year it is likely to stay there rather than start increasing again. Of course, the inflation data tomorrow could throw a wrench in the works, but for now it seems there is a clear case for a further rate cut at the Bank’s next meeting in March, and we continue to expect rates to fall to 3% later this year.”
Interest rate markets are now pricing two interest rate cuts in 2026.