- Wage growth slowed to 4.5 per cent in the three months to November.
- Payroll employment continued to contract through December.
- Analysts see growing room for interest rate cuts next year.
Fresh signs of weakness in the UK labour market are strengthening expectations that interest rates could be lowered further in 2026, as slowing pay growth and falling employment point to easing inflation pressure, according to analysis carried by Portfolio Adviser.
Data released by the Office for National Statistics on January 20 showed average earnings rising at a slower pace of 4.5 per cent in the three months to November 2025. At the same time, unemployment remained unchanged at 5.1 per cent, its highest level since early 2021.
Employment trends appear to be deteriorating. The number of people on company payrolls fell by 155,000 over the year to November, with a further monthly decline of 33,000. Early estimates for December suggest the slowdown deepened, with payroll numbers down 184,000 year-on-year, or 0.6 per cent, and 43,000 lower than the previous month.
Wages cool as private sector loses momentum
The figures come just ahead of the next policy meeting of the Bank of England on February 5, where interest rates are expected to remain under close review.
Michael Browne, global investment strategist at the Franklin Templeton Institute, reportedly said the easing in pay growth would be welcomed by policymakers focused on keeping inflation under control, as quoted by Portfolio Adviser.
Private sector wages showed the sharpest slowdown, rising 3.6 per cent on a quarterly basis, or 3.5 per cent when annualised, only slightly ahead of inflation. Public sector pay growth remained elevated, running at an annualised 7.5 per cent.
Construction and financial services recorded some of the weakest private sector pay trends. Wage growth in wholesale, retail and hotels also slowed sharply, dropping from 5.3 per cent to 4.4 per cent year on year. Browne reportedly described the timing of this slowdown, just ahead of Christmas, as a worrying signal for consumer demand.
He added that if public sector wage growth begins to ease and move closer to private sector trends, policymakers may feel more confident about lowering interest rates.
Hiring freezes weigh on outlook
Beyond wages, the broader employment picture is becoming more challenging. Employers are slowing recruitment, moderating pay settlements and building greater flexibility into their workforce structures, Browne reportedly said.
Retail, hospitality and construction are expected to continue cutting back as weak demand combines with rising costs linked to national insurance and minimum wage changes. Job vacancies in retail declined again in December.
Richard Carter, head of fixed interest research at the Quilter Cheviot, quoted in the report as saying many businesses paused hiring plans ahead of the Budget and have yet to restart them, according to Portfolio Adviser.
He noted that higher national insurance costs and changes to exemptions are making firms cautious about expanding payrolls. While recent GDP data showed only modest growth, Carter reportedly said the latest labour market figures point to a difficult start to 2026 for consumer-facing sectors.
Looking ahead, he suggested there is room for further interest rate cuts over the course of 2026, though policymakers are expected to move gradually as they assess inflation data and wider economic conditions
