Bank of England set to cut interest rates in March
The Bank of England is poised to slash interest rates next month, as fresh labour market data reveals a deepening slowdown in the UK economy.
The Office for National Statistics (ONS) data for the three months to December 2025 paints a stark picture: the jobless rate rose from 5.1% to 5.2%, the highest level since early 2021 outside the pandemic period, while payrolled employment tumbled by 134,000 (0.4%) in January compared to a year ago.
Vacancies remained flat at 726,000, signaling businesses are quietly shelving recruitment plans amid mounting costs and uncertainty.
“Headline pay growth eased in December, falling from 4.4% to 4.2%. The fall in headline pay was partly driven by an easing in public sector wage settlements, which fell for the first time since July 2025.
Demand for labour remains weak which has curtailed workers’ bargaining power, meanwhile falling costs for households should also temper pay demand amongst workers.
On a positive note, the data raises the prospect of the Bank of England resuming cutting interest rates in March, says Yael Selfin (Vice Chair and Chief Economist at KPMG in the UK).
“The MPC will be reassured by further evidence of pay pressures easing, and the labour market continuing to soften. The Bank may also want to minimise downside risks to the labour market and lower rates ahead of the next forecast meeting in April.”
While there was a steady rise in the unemployment rate in 2025, KPMG forecasts unemployment to stabilise around the current level over the coming year.
“Forward-looking survey data points to hiring conditions beginning to improve, while vacancies have broadly been flat over the past few months. Overall, we expect the unemployment rate to average 5.2% in 2026,” Selfin said.
This view was echoed by Jonathan Raymond (Investment Manager at Quilter Cheviot). “Having held rates where they were at the first meeting of the year, calls are growing louder for the Bank of England to reduce rates at its next meeting in March. Inflation is expected to fall considerably in the coming months and as such focus from the BoE will be more on the labour market,” he said.
“With economic growth languishing at the end of 2025, the recipe is there for a rate cut to be delivered. However, without an uptick in consumer or business confidence, growth is likely to continue to be found wanting and the jobs market may remain uncertain for a while longer.”
