UK unemployment rate rises more than expected to 5%

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The UK unemployment rate rose to 5 per cent and wage growth slowed in the three months to September, sparking a rally in gilts as traders raised bets that the Bank of England will cut interest rates next month to boost a lacklustre economy.

Tuesday’s unemployment figure from the Office for National Statistics was the highest for a decade outside the pandemic period, and above the 4.9 per cent expected by economists.

The rise in the jobless rate followed a long period of weak hiring, with revised tax data showing payroll employment has fallen by 180,000 since chancellor Rachel Reeves announced higher taxes on employers in last year’s Budget.

The figures are a setback for the government ahead of the Budget on November 26, when Reeves is expected to raise taxes further to fill a fiscal hole some economists estimate to be £30bn.

Business groups said the stagnant hiring reflects employers’ fears that they will face fresh tax increases even as the government’s move to strengthen workers’ rights makes hiring riskier.

“There is little comfort in this data for businesses or the government. Employers are being squeezed by sky-high employment costs, and we are beginning to see the consequences,” said Jane Gratton, deputy director of public policy at the British Chambers of Commerce.  

Following the figures, traders increased bets that the BoE’s Monetary Policy Committee will make a quarter-point rate cut next month from about 60 per cent to 75 per cent, according to levels implied by swaps markets.

The yield on the two-year gilt, which is sensitive to interest rate expectations, fell 0.08 percentage points to 3.73 per cent, its lowest level since August 2024.

The pound fell following the data before recovering against a broadly weaker dollar to trade flat by early evening in London at $1.317. It was down 0.3 per cent against the euro.

Pooja Kumra, a rates strategist at TD Securities, said: “This report pretty much locks in a December cut.”

Tuesday’s figures showed that the number of people on payroll fell by 117,000 or 0.4 per cent over the year to September. Provisional payroll figures for October showed a further fall of 32,000 on the month, bringing the annual drop to 180,000, but this figure is likely to be revised.

The unemployment rate was 4.8 per cent in the three months to August.

A separate ONS survey showed wage growth slowed in line with analysts’ expectations in the three months to September. The annual rate of growth in weekly earnings, excluding bonuses, eased to 4.6 per cent, from 4.8 per cent in the three months to August.

“The UK labour market is weakening on all fronts,” said Nye Cominetti, principal economist at the Resolution Foundation think-tank, urging the chancellor “to protect workers from more pain in her upcoming Budget and avoid adding further costs to employers”.

The MPC held rates at 4 per cent in a knife-edge vote last week but signalled a cut could come as soon as December if price pressures continued to ease.

Governor Andrew Bailey underlined concerns that wage growth, while slowing, might “plateau” at too high a level, but also pointed to risks of higher job losses.

The BoE said it expected unemployment to peak at just over 5 per cent in the second quarter of 2026.

Many economists say raising income tax would be less damaging to the economy than further increases that penalise employment, although it would breach Labour’s pre-election manifesto.

Employers say that if the government presses ahead with plans to restrict the tax benefits of salary sacrifice schemes, it could hit wages and hiring with a similar effect to the NI rise.

Pat McFadden, secretary of state for Work and Pensions, said the figures showed “exactly why we’re stepping up our plan to Get Britain Working” through reforms to jobcentres and a drive to help young people start careers.

But Helen Whately, Conservative shadow minister, said rising unemployment was the result of the chancellor’s “bad choices” in “hiking up taxes on jobs, piling red tape on businesses, and destroying confidence in the economy”, while families now faced “even more punishing tax rises”.