UK Labour Market Weakens, Raising Hopes of a December Rate Cut by Bank of England

Recent data from the Office for National Statistics (ONS) reveal that the UK unemployment rate rose to 5.0% for the three months to September, the highest level since early 2021.

This deterioration in the labour market has strengthened expectations that the Bank of England (BoE) will move to reduce interest rates in December.

Labour Market Softening: Key Indicators

• Payroll figures indicate a decline of 32,000 jobs in both September and October, marking the largest two-month drop since 2020.

• Wage growth for regular pay (excluding bonuses) has slowed, with private-sector earnings growth dropping to its weakest level since early 2021.

• Youth unemployment and economic inactivity remain elevated, particularly in sectors such as hospitality, retail and IT.

Market Implications & BoE Response

The combination of rising unemployment and easing wage pressures is reducing inflation heat and lifting the probability of an early rate cut.

Markets are pricing a significant likelihood of a BoE reduction at its upcoming meeting, with some estimates putting the odds above 70%.

The BoE’s own November 2025 Monetary Policy Report noted that underlying disinflation is becoming more apparent and that labour market slack is widening both conditions that favour an eventual lowering of the Bank Rate.

Risk Factors & Policy Tradeoffs

Even as the labour market softens, the BoE must balance the risk of cutting rates too early against persistent inflation pressures and uncertain global dynamics.

Also, the upcoming scheduled budget by Chancellor Rachel Reeves includes significant tax and spend measures, which could either dampen growth further or support demand, complicating the policy outlook.

With the UK labour market showing clear signs of weakening, the focus has shifted from “when” to “how soon” the Bank of England will begin to ease monetary policy. A December rate cut is now increasingly anticipated what remains uncertain is how the BoE will sequence further reductions in light of inflation, global risks and fiscal pressure.