LONDON — The UK labour market showed signs of cooling on Tuesday as the unemployment rate rose for the first time since July and wage growth eased more sharply than anticipated, according to data from the Office for National Statistics (ONS).
Between November and January, the unemployment rate unexpectedly ticked up to 3.9%, from 3.8% in the three months to December. City economists had forecast the rate would hold steady. The increase, though modest, marks a shift after months of tight labour conditions that have kept upward pressure on pay.
Average earnings growth also slowed. Excluding bonuses, pay rose 6.1% year-on-year, down from 6.2% in the previous quarter. Including bonuses, earnings growth fell to 5.6% from 5.8%. Analysts had expected a more moderate deceleration to 5.7% for the headline figure.
The data suggests that high borrowing costs are beginning to cool the labour market, easing inflationary pressures that have dogged the UK economy. However, the Bank of England is likely to remain cautious about cutting interest rates, given that wage growth — while slowing — remains relatively robust.
Rate Cut Expectations Tempered
Victoria Scholar, head of investment at interactive investor, noted that the figures offer some relief but may not be enough to prompt immediate action from the Monetary Policy Committee. "Wage growth, although weakening slightly, remains relatively robust which may not be enough for the Bank of England," she said. "The central bank has made it clear it wants to see significant evidence that pay growth is slowing before cutting interest rates. Nonetheless it still looks like a summer rate cut is on the cards."
Danni Hewson, head of financial analysis at AJ Bell, agreed that Tuesday's results are unlikely to bring a rate cut forward. "Wage growth is still uncomfortably high and with a bit more money in people’s pockets, thanks to cuts to NI and falling inflation, the MPC is likely to want to watch what happens in the next couple of months before taking action," she said.
The ONS also reported that the number of people claiming jobless benefits rose by 16,800 in February, an annual increase of 85,800. Vacancies fell for the 20th consecutive month, dropping by 43,000 in the three months to February. Despite the decline, the number of job openings remains significantly above pre-pandemic levels, partly due to long-term sickness among the working-age population.
The number of economically inactive people — those neither in work nor looking for employment — fell slightly in the last quarter but still stands at a near-record 2.7 million. "We have gone from chasing record levels of employment to tackling record levels of long-term sickness," said Louise Murphy, senior economist at the Resolution Foundation.
The UK's labour market dynamics are being watched closely across Europe, where similar trends of tight labour markets and persistent wage pressures have complicated central bank policy. In the eurozone, the European Central Bank has also signalled caution on rate cuts, though the bloc's unemployment rate remains at a historic low of 6.4%.
For now, the UK data points to a gradual easing of inflationary pressures, but the path to lower interest rates remains uncertain. As the Bank of England waits for more evidence, households and businesses will continue to navigate a period of elevated borrowing costs.
