December Rate Cut Looms as Jobless Rate Returns to COVID 19 Level

The Bank of England (BoE) held its key interest rate steady at 4% in November but is expected to reconsider its stance next month. Recent data from the Office for National Statistics (ONS) revealed that the unemployment rate increased to 5% in the three months to September 2025 — a level close to the peak during the COVID-19 pandemic.

Sticky Inflation and Rate Hikes

The central bank believes inflation has peaked, with a rate of 3.8% recorded in July, August, and September 2025. Although this remains nearly double the BoE's 2% target, policymakers are cautious about acting before the Autumn Budget presentation on 26 November.

Despite this caution, UK banks pre-empted the BoE by reducing lending rates from 4% on 4 November. Major lenders such as Barclays, HSBC, Halifax, Santander, and NatWest are now engaged in a mortgage rate war, eager to attract borrowers.

In a subsequent press conference, BoE Governor Andrew Bailey forecasted inflation could drop to around 3% early next year before returning to the 2% target. However, he emphasised that future rate moves will depend heavily on the measures Chancellor Rachel Reeves introduces, including potential tax hikes.

While higher taxes may help tame inflation, they could also squeeze consumers' disposable income. The Chancellor stated: 'The choices I make in the Budget this month will be focused on getting inflation falling and creating the conditions for interest rate cuts to support economic growth and improve the cost of living.'

A Labour Market in Decline

The latest ONS data confirms that the UK labour market is faltering. The unemployment rate has reached its highest level since August 2016, rising to 5%. Meanwhile, wage growth slowed slightly, falling to 4.6% in the third quarter from 4.7% in the previous three months.

Liz McKeown, Director of Economic Statistics at the ONS, commented: 'Taken together, these figures point to a weakening labour market.' The rising unemployment has fuelled speculation that a rate cut in December is almost inevitable.

Initial data for the year to October indicates that around 180,000 people were removed from company payrolls — a 0.6% decline that exceeded expectations. The number of people claiming unemployment benefits is approximately 1.7 million, marginally lower than a year ago.

Between August and October 2025, job vacancies increased marginally by 2,000 to 723,000, compared to the previous quarter. This modest rise — the first in over three years — is significantly below the pre-pandemic record of 1.3 million vacancies in March-May 2022.

Richard Carter, Head of Fixed Interest Research at Quilter Cheviot, believes many firms are postponing major hiring plans until after the Budget. 'Many businesses hope the Chancellor will focus on job creation and growth,' he said.

Nye Cominetti, Principal Economist at the Resolution Foundation, warns that the UK labour market is weakening across the board. He urged Reeves to protect workers from further hardship in her upcoming Budget and to avoid adding additional costs to employers.

BoE Governor Bailey acknowledged that wage growth is slowing but expects it to stabilise at a high level due to ongoing job losses. The Bank forecasts the unemployment rate will peak above 5% in the second quarter of 2026.

Clear Signs for Policymakers

With the next Monetary Policy Committee (MPC) meeting just a month away, policymakers are closely watching the data. Sanjay Raja, Chief UK Economist at Deutsche Bank, remarked: 'While Budget uncertainty may be hampering hiring plans heading into Q4 2025, one thing is clear: today's data should continue to strengthen the case for a Christmas rate cut.'