UK unemployment reaches 4.7% as labour market cools, raising pressure for Bank of England rate cut

Unemployment in the UK rose to a four-year high of 4.7% in May, according to new figures from the Office for National Statistics (ONS), fuelling expectations that the Bank of England could cut interest rates again in August.

The increase from 4.6%—which caught economists and the Bank itself by surprise—comes alongside signs of a broader slowdown in the labour market, with wage growth easing and payroll numbers shrinking. The data reinforces concerns that the UK economy is losing momentum, and strengthens the case for further monetary easing to avoid a deeper downturn.

Average weekly earnings (excluding bonuses) fell to 5% from 5.3%, while wages including bonuses also dipped from 5.4% to 5%, broadly in line with forecasts. Meanwhile, the latest payroll estimates show a monthly fall of 41,000 jobs in June, following a revised 25,000 drop in May. Over the past year, payrolls have contracted by 178,000, or 0.6%, with much of the decline concentrated in the months following the government’s hike in national insurance contributions.

Governor Andrew Bailey said earlier this week that the Bank is “ready to act” if the labour market deteriorates further. Since the start of 2025, the Monetary Policy Committee (MPC) has already cut interest rates twice, bringing them down from 5.25% to 4.25%. Financial markets are now pricing in a third cut to 4% at the Bank’s next meeting in August.

However, the MPC faces a delicate balancing act. June’s inflation figures showed consumer prices rising by 3.6%, up from 3.4% the previous month, well above the Bank’s 2% target. Despite this, private sector wage growth on an annualised basis has fallen to 3.7%—a figure rate-setters will take some comfort from, as they aim for a sustainable level of 3% wage growth to align with their inflation target.

Ben Harrison, director of the Work Foundation, said the UK labour market is entering a “challenging transition” period. “More employers are holding back from hiring, the pace of pay growth is easing, but the number of people beginning to look for work is on the rise,” he noted. Despite the recent gains in real wages, Harrison pointed out that the average increase since the 2008 financial crisis equates to just £28 a week.

The rise in national insurance contributions has been cited by economists as a key contributor to the softening labour market, increasing costs for employers and prompting firms to curb hiring. Governor Bailey has acknowledged that the impact of the NICs rise on jobs and wages has been greater than anticipated.

The ONS also reported a notable fall in the economic inactivity rate, down 0.4 percentage points to 21%—its lowest level since 2019—as more people return to the workforce. However, the combination of a growing labour supply and shrinking payrolls has pushed the unemployment rate higher.

Job vacancies also continued to fall, dropping by 56,000 in the three months to June to 727,000—a three-year low.

Sanjay Raja, UK economist at Deutsche Bank, said the data will reinforce the Bank’s cautious stance, though not enough to justify a faster pace of rate cuts. “The labour market is loosening, but perhaps not as fast as the unrevised payroll data suggested. We continue to expect the Bank to proceed with a measured pace of one rate cut every three months.”

With the UK economy walking a tightrope between disinflation and stagnation, all eyes are now on the MPC’s August decision—where the trajectory of interest rates could be shaped as much by employment figures as by inflation data.

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