(Nov 11): UK unemployment rose more than expected, prompting traders to add to bets on a Bank of England interest-rate cut next month.
The jobless rate climbed to 5% in the three months through September, up from 4.8% the month before and the highest since early 2021 when the economy was under Covid restrictions, the Office for National Statistics said Tuesday. Economists had forecast a rise to 4.9%. Separate tax-based data showed the number of employees on payroll fell 32,000 in October following a downwardly revised 32,000 in September.
Opposition politicians pounced on the numbers, accusing Chancellor of the Exchequer Rachel Reeves of stoking joblessness with her £26 billion (US$34 billion) increase in employers’ national insurance contributions, a payroll tax. Business groups urged her to row back on plans to boost workers’ rights, arguing it will deter hiring even further.
The UK’s redundancy rate jumped to 4.5 per 1,000 employees in the three months to September, the ONS said, the highest since January 2024 and the second highest since the pandemic in 2021.
Traders increased wagers on BOE rate cuts after the data, and are now pricing in more than an 80% chance of a move at the next meeting in December. That’s up from 68% on Monday. The pound extended declines after the data, falling as much as 0.4% to US$1.3121., while gilts jumped, with 10-year yields dropping five basis points to 4.42%.
Private-sector pay growth slowed to 4.2% from 4.4%. It was the weakest reading since early 2021 and in line with the median expectation of economists.
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The report provides further evidence that the labor market is weakening. BOE governor Andrew Bailey, who voted to keep rates unchanged, signaled he could be persuaded to cut in December if data in coming weeks confirm his view that inflationary pressures are easing. Citing a weakening labour market, he said downside risks were more likely to materialise than upside risks.
The jobs report is the first in a series of data over the next few weeks that will determine whether the BOE will cut interest rates at its last meeting of the year on Dec 18. Next in line are GDP figures out Thursday which will provide the first snapshot of the economy in the third quarter.
Crucial to the December rates decision will be the Nov 26 budget, when Reeves is expected to lift taxes on households to fill a fresh hole in the public finances. That could hit growth and bear down on inflation, unlike her first budget when hikes to employer payroll taxes prompted many firms to raise prices.
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Business groups, economists and and opposition parties blame Reeves’ £26-billion hike in national insurance for pushing more people into joblessness. The latest jump in unemployment adds more pressure on the chancellor, amid reports she is considering an effective tax increase on millions of workers at her next budget. While senior Labour figures have warned against breaking an election pledge not to raise broad-based taxes, the Chancellor is running out of options to fill a multi-billion-pound fiscal gap.
Capital Economics UK economist Ashley Webb said the jobs report “slightly increases the chances that the bank will next cut interest rates in December, from 4.00% now to 3.75%, especially given the tightening in fiscal policy we think will be announced in the budget.”
Policymakers voted to hold interest rates at 4% last week in a tight 5-4 decision that appeared to set the stage for a reduction in December.
“Barring any upside surprises in the data and assuming the budget on Nov 26 delivers a disinflationary impulse, a December rate cut will be very much in play,” said Bloomberg Economics.
Rising unemployment is likely to provide ammunition to doves like deputy BOE governors Dave Ramsden and Sarah Breeden who favored a cut at the last meeting. The fall in payrolls last month bring to 180,000 the number of employees lost since Reeves’ first tax-raising budget in October last year.
The jobs market is central to the BOE’s judgment on future inflation. Huw Pill, the BOE chief economist who is hesitant about cutting rates, said on Friday that “the particular issue central to our thinking and concerns is the outlook for pay and pay settlements.”
The number of vacancies in the three months to October was up 2,000 from the previous quarter but still below their pre-pandemic level. The number of unemployed people per vacancy — a key measure of slack — was 2.5 in July to September 2025, an increase from last quarter and the highest since 2015.
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After adjusting for inflation, overall regular pay rose by 0.8%, growing at the weakest pace since August 2023. However, some parts of the economy still experience red-hot wage rises.
Regular pay for public sector workers rose by 6.6% in the three months to September, the fastest since late 2023. The ONS said the spike, from 6% in the prior month, was “affected by some public sector pay rises being paid earlier in 2025 than in 2024, causing a base effect.”
Wages are also growing strongly in the wholesaling, retailing, hotels and restaurants sector, where pay is up 5.7% on the year. These are the businesses were most exposed that were most exposed to Labour’s increase in employment taxes and the minimum wage rise. Tesco Plc and Sainsbury’s — Britain’s largest grocers, raised wages again in September, adding to overall pay pressures.
Meanwhile, Labour’s first budget is still weighing on the jobs market and fuelling pay pressures. Almost half of the firms surveyed by the BOE said they decreased employment in response to the government’s increase in employment taxes, with only 17% turning to lowering wages. At the same time, businesses expect to increase wages in the year-ahead by 3.7% in the three months to October, an increase from the month before.
Tomasz Wieladek, chief European economist at T Rowe Price, said the jobs figures “surprised already weak expectations.”
“The labour market works like an on-off switch: it is either tight or loose. The developments are in line with the stagnation in UK employment in recent months.”
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