The Bank of England’s case for a December interest rate cut strengthened Tuesday, according to Deutsche Bank’s Chief UK economist Sanjay Raja. His assessment comes after weaker-than-expected UK labor market data showing rising unemployment and moderating wage growth.
The official unemployment rate jumped to 5% in the three months to September, exceeding both market expectations and the Bank of England’s forecast of 4.9%. Employment fell by 22,000 during the same period, while redundancies rose to 134,000 - the highest level since January 2021.
UK government bonds rallied after data showed the unemployment rate rose more than expected with short-dated gilts leading the advance. United Kingdom 2-Year fell 6 basis points to 3.745% as traders increased bets on a Bank of England rate cut next month.
GBP/USD fell 0.2%, making it the softest performer among G10 currencies. UK equities, meanwhile, gained ground, with the FTSE 100 up 0.9% and outperforming other major European indexes.
Payrolled employees dropped by 32,000 following downward revisions to September figures, with weakness concentrated in retail and the information and communication sectors. The data suggests labor market slack is widening more rapidly than the Monetary Policy Committee (MPC) projected in its November forecasts.
Private sector regular pay growth slowed to 4.2% year-over-year on a three-month basis, matching expectations. Sequential pay growth decelerated further to 2.7% on a three-month annualized basis, with flash HMRC data indicating additional weakness ahead in the fourth quarter of 2025.
3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads. "Today’s data speaks to two things: one, there’s more slack building in the labour market – and perhaps more so than assumed by the MPC in its November projections; and two, pay momentum continues to slow. Both should be encouraging for the MPC," Raja wrote in a note.
Governor Bailey previously indicated the MPC needed more evidence before cutting rates again this year. According to Raja, today’s data should provide confidence that weakening employment conditions are translating into reduced pay pressures that will eventually impact inflation.
