UK unemployment rises to 5.2% as regular private-sector pay cools to 3.4%
Labour‑market momentum weakened markedly at the end of 2025: the unemployment rate rose to 5.2% and the Bank of England’s favoured measure of regular private‑sector pay cooled to 3.4%. Together, these datapoints significantly reduce the immediate risk of wage‑driven inflation and create policy space for an interest‑rate easing in the coming months if softness persists.
The Bank of England has signalled a cautious approach — effectively pausing further tightening while it evaluates fresh labour and inflation releases — emphasising that any change in stance will be guided by subsequent data rather than a permanent pivot. Financial markets have reacted by scaling back the odds of further near‑term rate hikes and by adjusting gilt yields and sterling pricing to reflect a longer window of policy optionality. Softer hiring and vacancy indicators reported alongside the official figures reinforce the view that slack is building, but headline measures can mask underemployment and falls in hours worked that only appear over time.
For households, the twin rise in unemployment and slower nominal pay growth implies weaker income growth and a narrower cushion against price shocks; consumer spending could slow, weighing on retailers, leisure and automotive demand. Businesses should reassess wage budgets and interest‑rate exposure as mortgage‑rate expectations and swap curves respond to the revised odds. Banks and lenders face a mixed outlook — funding and lending costs may ease, but lower loan demand and weaker nominal growth could compress margins.
Public finances are also vulnerable: sustained higher unemployment would slow tax receipts and increase welfare spending, complicating fiscal planning ahead of scheduled reviews. Internationally, a prolonged BoE pause could narrow rate differentials with peers and increase exchange‑rate volatility for sterling. Policymakers and markets will be watching vacancies, hours‑worked, and short‑term hiring trackers to determine whether the change is a transient cyclical dip or the start of a more persistent slowdown. In the near term, investors and firms should prepare for greater policy uncertainty and adjust scenarios for interest rates, consumer demand and corporate earnings accordingly.
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