Bleak jobs figures increase possibilities of a Bank of England fee reduce in March

Rising unemployment has increased the chance of a rate cut at the Bank of England’s next meeting in March, say economists.

In another blow to Labour’s growth mission, unemployment reached 5.2 per cent in the three months to December, its highest in a decade outside of the pandemic era.

With the jobs market shedding 121,000 employees in the year to December 2025, unemployment shows no signs of letting up as firms continue to reduce headcount in the face of higher costs.

Markets are now increasingly pricing in a cut in interest rates next month, with all eyes on inflation data due out on Wednesday morning.

Money markets put the chance of a March rate cut at almost 75 per cent, while 60 per cent of economists in a Reuters poll forecast a reduction from the current 3.75 per cent base rate.

Falling wage inflation has added to calls for a rate cut, with UK growth figures stuttering.

The market is increasingly pricing in a rate cut at the Bank of England’s next meeting 

Employment has been hit hard by the decision to raise employer National Insurance contributions in the 2024 Budget, along with increases to the minimum wage.

The services industry has been among the worst affected with widespread job cuts, largely in retail and leisure,

This has fed through to a slowdown in pay growth, which the Bank of England looks closely at to determine rate cuts.

Wage growth, excluding bonuses, fell to 4.2 per cent year-on-year in three months to December 2025, down from 4.5 per cent in November. 

This is a key factor likely to give the Bank of England’s Monetary Policy Committee more confidence to cut rates over the course of this year.

In its last meeting, the central bank held rates but indicated cuts could come sooner than expected against a backdrop of gloomy growth figures.

Last week, the ONS said gross domestic product increased by just 0.1 per cent in the final quarter of last year and 1.3 per cent for 2025 as a whole.

Markets are now increasingly pricing in a rate cut next month, prompting a rally in gilts prices and a weakening in the pound.

ING expects unemployment to ‘drift slightly higher’ towards 5.5 per cent, which suggests wage growth has further to fall.

Private sector wage growth is now 3.4 per cent, which ING expects to fall to 3 per cent by summer.

‘By the Bank of England’s own admission, that would be below the rate of pay growth that’s consistent with a 2 per cent target,’ said ING. 

‘Barring any surprises in next month’s data – or with inflation tomorrow – a March rate cut looks highly likely.’

January’s inflation data, which will be published on Wednesday, is expected to come in at around 3 per cent, as it starts to slowly move towards the BoE’s 2 per cent target.

But Andrew Wishart, senior UK economist at Berenberg, said stickiness in services inflation will likely see the Bank delay cuts until its end of April meeting.

He said: ‘In any case, amid fiscal consolidation, a weak labour market and cooling inflation the BoE will likely lower bank rate to 3 per cent by year end.’

Looking further ahead, ING expects another cut in June but doesn’t rule out the BoE ‘taking rates even lower as it becomes more evident that inflation risks are subsiding.’

Good news for mortgage borrowers

While this morning’s figures paint a gloomy picture for the economy, a rate cut next month would be welcomed by homeowners.

Swap rates, which fixed rate mortgages are priced off, are likely to continue their downward movement off the back off today’s jobs data.

This morning, Gen H trimmed rates by up to 0.2 percentage points, with one broker claiming mortgage rates will ‘consolidate in the 3 per cent band if this economic slide continues.’

Zaman Sheikh, director of broker Northwood Chelmsford said: ‘Swap rates should continue to edge down after this jobs data and that will feed into mortgage rates, which will support transaction levels in the months ahead.

‘Rates creeping down will be a boost to aspiring homeowners in particular, for whom every small rate cut counts. Lenders have already been cutting rates at high loan-to-values across the board and further rate cuts will put even more fire in the belly of first-time buyers.’

Justin Moy, Managing Director at Chelmsford-based EHF Mortgages, added: ‘Swap rates, and mortgage rates with them, will continue their slide throughout 2026 based on this evidence. 

‘Yes, there will be blips as other factors affect the economy, but we will see mortgage rates consolidate in the 3 per cent band if this economic slide continues.’