Key Takeaways:
The UK labor market showed further signs of softening as the unemployment rate climbed to a higher-than-expected 5.0 percent, complicating the Bank of England's next move.
The UK’s unemployment rate rose to 5.0% in the three months to March, exceeding consensus forecasts and adding to evidence of a cooling labor market that could allow the Bank of England to keep interest rates on hold.
"Latest figures suggest the labour market remains soft, with vacancies at their lowest level in five years and unemployment higher than a year ago," Liz McKeown, director of economic statistics at the Office for National Statistics, said in a statement.
The data showed annual growth in average regular earnings, excluding bonuses, slowed to 3.4 percent from 3.6 percent, in line with expectations. An early estimate for April also indicated payrolls fell by 100,000, the largest drop since the pandemic, though the ONS cautioned the figure is subject to revision.
The combination of rising unemployment and slowing wage pressures weakens the case for further interest rate hikes from the Bank of England, which has held its key rate at 4.5% since March 2025. Policymakers have been watching the tight labor market for signs of persistent inflation, but these latest figures may give them room to pause their tightening cycle at the next meeting.
The headline unemployment rate was up 0.5 percentage points compared to the same period a year earlier, though it was down slightly from the 5.1% recorded in the three months to February. The figures arrive as the UK economy grapples with soaring energy costs, driven in part by the conflict in the Middle East, which are beginning to impact corporate hiring decisions.
A recent survey of 500 midsize UK companies by accountancy firm BDO found that 30 percent of firms were considering hiring freezes or staff reductions because of the elevated costs. This trend is already visible in some sectors, with British polymer manufacturer Victrex announcing last week it would reduce its workforce by 10 percent. The ONS noted that lower-paying sectors such as hospitality and retail have seen some of the largest falls in vacancies.
While headline wage growth is moderating, the data revealed a significant divergence between the public and private sectors. Regular pay in the public sector grew by 4.8 percent, while private sector pay rose by a more muted 3.0 percent.
When including bonuses, average weekly earnings grew by 4.1 percent, slightly ahead of forecasts. However, the slowdown in regular pay, which is more closely watched by the central bank as a measure of underlying inflationary pressure, will be a key consideration for monetary policy. The rising unemployment rate weakens workers' bargaining power, potentially capping further pay demands and helping to ease inflation.
This article is for informational purposes only and does not constitute investment advice.
