Financial markets see a greater chance of an interest rate cut at the Bank of England meeting, following fresh UK labour market figures that showed rising rates of unemployment and wage growth. 

After the Office of National Statistics released the data, markets were quick to price an increased chance of a rate cut from the BoE’s monetary policy committee, with a 91% chance of a cut now seen at the meeting on 6 February.

What’s more, the interest rate futures market now expects UK interest rates to end the year at 4.06%, down from 4.09% yesterday.

While UK average pay growth ticked up to 5.6% from 5.2%, Kathleen Brooks, head of research at XTB, said the MPC “may look through” this key data point since it was mostly down to the ‘base effects’ from wages dropping 12 months previously in late 2023.

“Other elements of this data could also moderate the inflationary impact of this jobs report,” said Brooks, with the unemployment rate rising and December payrolls falling in the largest monthly decline since late 2020 on the back of a drop in November too.

“Thus, while wage growth remains a concern for inflation, there is obviously a softening in the labour market data, that could trigger a decline in inflation down the line.

“The pound has remained stable on the back of this data, as the market focuses on the declining jobs number, which could focus minds at the BOE about recession fears. Although wage growth is a well above the BoE’s target rate, the labour market is a lagging indicator, so if payrolls growth is in decline, weaker wages could follow.”

The ONS data “adds to evidence that the UK economy is rapidly weakening and will need BoE support to get out of its current malaise,” Brooks said.

Ashley Webb, UK economist at Capital Economics, agreed that while pay growth will cause the MPC “some unease”, the rate setters will “take comfort from the continued loosening in labour market activity”.

He said he remains confident of an interest rate cut at the next meeting on 6 February from 4.75% to 4.50%, followed by further gradual rate cuts thereafter.

“Overall, some MPC members may be worried by the resurgence in regular private sector pay growth. But we suspect most of them will look at the signs that the loosening in the labour market will mean that wage growth will soon resume a downward trend.”