The latest official data shows the UK labour market continues to loosen. Figures for September show the unemployment rate ticked up and pay growth slowed. What’s more, we had thought payroll falls were easing, but revisions to September’s data and a big drop in October suggest the labour market continues to soften. Evidence of pay growth disinflation and a weakening jobs market only bolster the case for the Monetary Policy Committee (MPC) to cut interest rates in December.

Are UK job losses re-accelerating?

Starting with the official employment figures, today’s data shows the UK unemployment rate rising to 5% from 4.8% in September and employment falling by 22,000 on the quarter.

We’re reading these figures with caution because it looks like some of this was driven by an erratic-looking jump in unemployment in the single-month figures. The Labour Force Survey (LFS), where official employment measures are derived from, also continues to be distorted by a low response rate.

However, payroll weakness has re-accelerated. The number of employees on payrolls fell by 32,000 in October. September’s 10,000 fall was also revised down to match October’s figure. It’s worth cautioning here too that payroll data are extremely revision-prone and have also been revised up heavily in previous months. That said, given the similarities between the LFS and payroll data, we think some of this weakening is genuine.

What does the latest UK job vacancies data tell us?

The good news is that UK job vacancies rose slightly in September and have been broadly unchanged for five months now, suggesting labour demand is stabilising. This should help to support employment going forward and provides some reassurance that the labour market won’t weaken dramatically in the coming months.

Yet, while a suite of labour market indicators suggests there is a genuine broad-based weakening underway, the question is if this is due to concern about the upcoming Autumn Budget or a reflection of the UK economy in the second half of the year.

Slowing UK pay growth means more interest rate cuts ahead

Turning to the latest UK pay data, private sector regular pay growth – the measure most relevant to the MPC as it’s most reflective of underlying inflationary pressures – fell to 4.2% from 4.4%. It’s now at its lowest level since December 2021, which will reassure the MPC that the pay growth slowdown is still underway.

We think slowing pay growth and a faster-than-expected weakening in the labour market all but seals the deal on a December interest-rate cut. In fact, today’s dismal labour market report may be enough to tempt the MPC into a December interest-rate reduction, even without a disinflationary Autumn Budget, as the more dovish members of the Committee grow concerned about rising unemployment.

What’s more, the Chancellor will need to raise at least £30bn to restore her fiscal headroom at the Autumn Budget, so these latest figures are another challenge for her. Real total pay growth has fallen to just 0.7% in September and further tax hikes will likely fall on households, dragging on incomes. This means a further stagnation in living standards seems likely, which will weigh on consumer spending going forward.

All told, we are increasingly certain that the next interest rate cut will come in December as a deflationary Autumn Budget, slowing pay growth and lower-than-expected peak in inflation all clear the way for further cuts.

Markets agree with our view. Bets on a December rate cut rose to 86% from 70% yesterday. Further ahead, we maintain our call for now that interest rates will settle around 3.5% next year as inflation and the economy remain resilient. However, we are considering pencilling in more interest rate cuts for 2026, especially with a big, and hopefully, deflationary Autumn Budget ahead.

Sign up to our Real Economy communications for regular commentary and analysis on the changing economic landscape.

Related insights