According to the Office for National Statistics, the UK’s unemployment rate dropped to 4.7 per cent in the quarter ending August. This decline has prompted traders to predict a Bank of England interest rate hike to 4 per cent in November.
The figure decreased from 4.8 per cent, surpassing economists’ 4.9 per cent forecast. The data also revealed increased employment, reduced economic inactivity, and stable wage growth.
Employment and Wage Growth
Average weekly earnings, excluding bonuses, rose by 3.7 per cent, up from 3.6 per cent, contrary to economists’ predictions of no change. Private sector wage growth increased from 2.9 per cent to 3 per cent.
September’s monthly payrolls grew by 13,000, defying expectations of a 15,000 decline. The ONS revised August’s estimate from a 26,000 drop to a 1,000 increase.
Jobs Market and Interest Rates
Vacancies decreased by 21,000 to 691,000 in the three months to September, the largest quarterly drop since the year’s start. Traders anticipate four interest rate increases over the next 12 months, including one in November.
Investec economist Ellie Henderson stated, “data support our existing call that the monetary policy committee will collectively decide to increase the Bank rate by 0.25 percentage points at the next meeting in November, framing it as a ‘risk management’ move”. Citi’s chief UK economist, May Rostom, said, “We think the MPC will look at this print, in conjunction with the strong GDP data of late, and feel comfortable that the economy is looking resilient in the face of a potential rate hike in November.”
The Bank has maintained the Bank Rate at 3.75 per cent throughout 2026, with the next monetary policy committee decision scheduled for 5 November. Some committee members argue the economy can withstand its first interest rate increase in three years.
Economic Outlook
Consumer price inflation, at 3.1 per cent in August, is projected to reach 3.4 per cent in September’s figures. Pantheon’s chief UK economist, Rob Wood, predicted the Bank would likely raise interest rates to 4.25 per cent in February.
UK government bond yields increased post-data release, with the ten-year gilt yield rising by 0.06 percentage points to 5.44 per cent. This rise indicates expectations of tighter Bank policy.
Employment increased by 102,000 over the three-month period, while total pay growth, including bonuses, slowed from 3.9 per cent to 3.7 per cent, the lowest since August-October 2020. Novuna Business Finance reported earlier this month that 26 per cent of small firms anticipate growth in the final quarter of 2026, reflecting some business optimism.
As the economy evolves, the Bank’s decision will shape its direction. The monetary policy committee will consider factors like inflation and the jobs market before deciding on interest rates. Rob Wood also noted increased risks of further tightening in 2027, suggesting a potentially more cautious Bank approach.