---
title: UK Wage Growth Falls to 4.2% as Labour Market Weakens on All Fronts
description: ONS data released on 17 February shows UK wage growth and employment falling in tandem, with markets now pricing three Bank of England rate cuts to 3% by year-end.
author: Darie Nani (Editor-in-Chief)
date: 2026-02-17T10:11:42.000Z
updated: 2026-02-26T17:55:07.564Z
canonical: https://www.sovereignmagazine.com/article/uk-wage-growth-falls-to-4-2-as-labour-market-weakens-on-all-fronts
image: https://cdn.nanimediahouse.com/iszjxklblkw.jpg
categories: Business, Economy
content_type: News
region: United Kingdom
publication: Sovereign Magazine
---

Annual growth in average weekly earnings slowed to 4.2% in the three months to December 2025, down from 4.7% in the previous period, according to data published by the Office for National Statistics on 17 February. The reading, which covers both regular and total pay, came in below analyst forecasts and represents the sharpest deceleration in earnings growth since the Bank of England began its rate-cutting cycle in August 2024.

The slowdown removes what had been the central bank’s primary reason for caution. Wage growth had remained stubbornly elevated even as other indicators weakened throughout 2025, creating a disconnect that complicated the Monetary Policy Committee’s decisions. That gap has now closed.

## Unemployment rose to 5.2%

The broader labour market deteriorated alongside wages. Unemployment reached 5.2% in the October to December quarter, up from the previous period and above year-ago estimates. The Work Foundation noted that the United Kingdom now has the fastest annual increase in unemployment across the G7, with 331,000 more people out of work than a year earlier.

Youth unemployment hit 14%, the highest rate in five years, with 575,000 people aged 18 to 24 out of work (an increase of 80,000 on the quarter). The employment rate fell to 75% for working-age adults, while payrolled employees dropped by 134,000 year on year to 30.3 million.

Vacancies offered no offset. Openings held at 726,000, essentially unchanged on the quarter, suggesting employers are neither hiring nor cutting positions at pace but instead freezing recruitment.

## Private sector pay grew just 3.4%

The headline 4.2% figure masks a widening gap between sectors. Public sector regular earnings grew 7.2%, inflated by a base effect from pay rises that were awarded earlier in 2025 than in 2024. The ONS said this distortion has now peaked and will phase out over the next few periods.

Private sector regular earnings grew 3.4%, a level that sits closer to the Bank of England’s comfort zone. In real terms (adjusted for CPIH inflation), total pay growth was just 0.5%.

## Markets now expect three rate cuts in 2026

Sterling fell below $1.36 after the release as traders repriced the rate path. Swap markets are now pricing three 25 basis point reductions by year-end, which would bring Bank Rate to 3% from 3.75%.

The MPC voted 5-4 to hold rates at its February meeting. Deputy Governor Sarah Breeden said on 12 February that it is ‘reasonable to expect’ a further quarter-point cut by the end of April. Today’s data strengthens that expectation. With wages and employment now declining in tandem, the committee’s two holdout arguments (resilient pay growth and a tight labour market) have both weakened materially.

## Further Context

**Q: How does wage growth affect Bank of England interest rate decisions?**
The Bank of England uses wage data as a leading indicator of future inflation. When earnings rise faster than productivity, businesses pass higher labour costs on to consumers through price increases. The MPC considers wage growth above roughly 3.25% (for the private sector) to be inconsistent with its 2% inflation target. Throughout 2025, elevated pay growth was the primary factor preventing faster rate cuts, even as other economic indicators weakened. Private sector earnings have now fallen to 3.4%, approaching the level the Bank considers compatible with stable prices.

**Q: When is the Bank of England expected to cut interest rates next?**
Markets and economists are split between March and April 2026 for the next reduction. Morgan Stanley and BNP Paribas expect a cut at the 19 March meeting, while Berenberg and several other forecasters point to 30 April. Deputy Governor Sarah Breeden said on 12 February that a quarter-point cut by end of April is ‘reasonable to expect’. Swap markets currently price three 25 basis point reductions by year-end, which would bring Bank Rate from 3.75% to 3%. The February MPC vote was 5-4 to hold, the narrowest possible margin for inaction.

**Q: Why is UK unemployment rising faster than in other G7 economies?**
The United Kingdom added 331,000 unemployed workers over the past year, the fastest annual increase among G7 nations. Several factors contributed. Employer National Insurance contributions rose in April 2025, increasing the cost of hiring. Economic growth remained sluggish at around 1% through the year, limiting demand for new workers. Sectors most exposed to consumer spending (retail, hospitality and leisure) cut headcount as households reduced discretionary spending. Youth workers were disproportionately affected because entry-level roles in those sectors were cut first, pushing the 18-to-24 unemployment rate to 14%.