Weak UK jobs data in the run up to the Budget could “empower” the Bank of England to cut interest rates further in 2026, industry commentators say.
According to the Office for National Statistics (ONS) release this morning (20 January), average wage growth slowed to 4.5% in the three months to November 2025. The jobless rate held at 5.1%, meanwhile, marking its highest level since January 2021.
Estimates for payrolled employees fell by 155,000 between November 2024 and November 2025, and dropped by 33,000 on a monthly basis. The provisional estimate for December 2025 shows payrolled employees fell a further 184,000, or 0.6% on the year, and by 43,000 on a monthly basis.
The release comes ahead of the next Bank of England Monetary Policy Committee meeting on 5 February.
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Michael Browne, global investment strategist at Franklin Templeton Institute, said the pay data is encouraging for the Bank of England’s MPC rate-setters, given its concern over persistent inflation.
Private sector pay growth fell on a quarterly basis to 3.6%, annualised at 3.5%, just above inflation. Meanwhile, wage growth in the public sector rose an annualised 7.5%.
Construction and finance workers led the private sector slowdown, while wholesale, retailing and hotels saw a sharp year on year decrease from 5.3% to 4.4%. which, Browne said, in the run up to Christmas is “ominous” for the economy.
“If the public sector pay increases slow and start to mirror those in the private sector, the MPC will be able to be confident that rate cuts are possible,” added Browne.
“Outside of the public sector, employment is getting tougher, pay settlements are slowing sharply and employers are building flexibility into their wage forces. As the retail, hospitality and construction sectors look to continue to downsize due to slow demand and rising costs driven by National Insurance and minimum wage payments, we should brace for some difficult numbers for the first quarter of 2026. Vacancies in retail fell again in December.
“Again, this is good news for the MPC, who will be empowered to make rate cuts in the face of a slowing economy. Whilst the overall activity of the UK economy is just about holding up, the employment data points to demand weakness and thus a tough first quarter for the consumer facing economy.”
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Businesses put hiring plans on hold ahead of the budget and it seems they are yet to restart, Richard Carter, head of fixed interest research at Quilter Cheviot, added.
“National insurance costs for businesses rose substantially last year, and the incoming cap on NIC exemptions will make many firms think twice before increasing their commitments,” he said.
“Initial estimates for December show the market weakened even further during the festive period, with the number of payrolled employees decreasing by 43,000 on the month and 184,000 on the year, though this is subject to revisions.”
Looking ahead to the path of interest rates, Carter said there is seemingly scope for more cuts throughout 2026.
“Last week’s GDP data showed a rather meagre return to growth, and tomorrow’s inflation data will reveal whether it is getting any closer to the Bank’s 2% target. Regardless, it seems that the first rate cut of the year is unlikely to come for a few months yet, and the Bank will be biding its time and keeping a close eye on what unfolds in the coming weeks – in the UK and beyond.”
