‘Budget circus’ weighs on jobs however slowing wage progress paves approach for extra rate of interest cuts this 12 months

A softer jobs market and slowing wage growth pave the way for more interest rate cuts this year, say economists.

Official figures show the overall unemployment rate remained at 5.1 per cent in the three months to November, its highest level in five years, while private sector payrolls fell 55,000.

The cooling jobs market is starting to show in wage growth, which eased from 4.6 per cent to 4.5 per cent.

Private sector wage growth slowed to 3.6 per cent between September and November, its weakest rise in six years, while public sector employees enjoyed a 7.9 per cent boost to their earnings.

The boss of Lloyds Banking Group said he expects interest rates to fall in the coming months – giving the economy a much needed lift.

Speaking to CNBC at the World Economic Forum in Davos, Charlie Nunn said: ‘We are expecting interest rates to continue to decline, and that’s going to give us optimism for households and businesses to invest more. So yeah, we really do need that stimulus to get confidence to invest higher and then grow.’

Rob Wood, chief UK economist at Pantheon Macroeconomics, said the ‘Budget circus crescendo in November continued to weigh on job growth’ but slowing wages will be welcomed by the Bank of England.

Rate cuts on the way: Economists predict the Bank of England will slash the base rate this year

That said, the Office for National Statistics (ONS) has boosted the sample size of the Labour Force Survey, which means the jump in the jobless rate in the third and fourth quarter should be taken with a pinch of salt.

‘The MPC will likely treat it with caution, if only because the jobless rate seems to have stabilised for now,’ said Wood.

The central bank, worried about sticky inflation, will also be carefully watching Wednesday’s CPI reading which could surprise to the upside.

The market has already priced in more rate cuts this year as conditions improve, but ING economists think today’s unemployment figures won’t change the minds of Bank officials ahead of its February meeting.

‘We expect rates to remain on hold next month,’ they said. ‘By March, however, the Bank will have had a further two jobs reports and, assuming the current benign wage growth trends continue, we think it will have enough evidence to cut rates again.

‘By June, we should have had inflation data showing headline CPI back at 2 per cent or even below, which could spur one final cut that month, leaving Bank Rate at 3.25 per cent.’

Pantheon Macroeconomics thinks the BoE will wait until April to cut rates.

Hospitality and retail suffer after Budget

While the prospect of a rate cut will be good news for homeowners, the ONS figures paint a bleak picture for businesses.

ONS director of economic statistics Liz McKeown said: ‘The number of employees on payroll has fallen again, with reductions over the last year concentrated in retail and hospitality, and reflecting ongoing weak hiring activity.’

In better news, the overall share of working-age adults classed as inactive was close to a near six-year low, which Martin Beck, chief economist at WPI Strategy said is a ‘positive sign for the economy’s supply side.

‘Job vacancies did see a slight uptick towards the end of last year, offering a glimmer of hope. That job openings have broadly plateaued since mid-2025 suggest that the effects of last year’s hikes in employer NICs and minimum wage increases may have largely worked their way through the system.’

However, he warns that increases in the minimum wage in April alongside the employment rights bill risk ‘a growing divide in the labour market, with younger workers facing worse labour market outcomes.’

Tariff threats loom

On Monday, economists warned that another round of US tariffs could put Britain at risk of recession.

President Trump has vowed to impose a 10 per cent levy on imports from countries willing to defend Greenland from 1 February, and the Bank of England will need to keep a keen eye on how this translates into the wider economy.

Danni Hewson, head of financial analysis at AJ Bell said: ‘Nerves about the potential impact of any fresh tariffs could derail the momentum evident in November’s economic growth numbers, with many exporters watching events over the next few weeks very closely.’