UK Unemployment Rises as Wage Growth Slows, Pressuring Interest Rate Decisions
Published 16 July 2025
Highlights
- The UK unemployment rate rose to 4.7% in the three months to May, marking a four-year high.
- Wage growth slowed to 5% during the same period, prompting discussions on potential interest rate cuts by the Bank of England.
- Inflation unexpectedly increased to 3.6%, complicating the Bank's decision on interest rates.
- The number of job vacancies fell to 727,000, continuing a three-year decline in available positions.
- Economic inactivity improved slightly, but long-term sickness remains a significant factor, accounting for 39.3% of inactivity.
-
Rewritten Article
UK Unemployment Rises as Wage Growth Slows, Pressuring Interest Rate Decisions
The UK's labour market is showing signs of strain as unemployment rates climb and wage growth decelerates, according to recent data from the Office for National Statistics (ONS). The unemployment rate increased to 4.7% in the three months leading to May, the highest level in four years. This rise in joblessness coincides with a slowdown in wage growth, which fell to 5%, a development that could influence the Bank of England's upcoming interest rate decisions.
Inflation and Interest Rate Dilemmas
The unexpected rise in inflation to 3.6% has added complexity to the Bank of England's monetary policy strategy. While the central bank had been considering interest rate cuts to stimulate the economy, the inflation surge presents a challenge. Former Bank of England rate setter Andrew Sentance described a potential rate cut as "irresponsible" given the current inflationary pressures. Nevertheless, many economists, including Yael Selfin from KPMG UK, suggest that the slowing wage growth opens the door for a rate cut in August.
Job Market Weakness and Economic Inactivity
The UK job market continues to weaken, with the number of vacancies dropping to 727,000, marking the 36th consecutive month of decline. This trend reflects a broader economic slowdown, with firms hesitant to hire or replace departing employees. Despite a slight improvement in economic inactivity rates, long-term sickness remains a significant issue, accounting for 39.3% of those not in the workforce.
Business Impact and Individual Stories
Businesses across the UK are feeling the pressure of rising costs and a sluggish economy. Peter Kinsella, owner of two Spanish restaurants in Liverpool, describes the current period as the toughest since the 2008 financial crisis. He has been forced to reduce staffing hours and delay investments to manage expenses. "We're managing, but by the skin of our teeth," Kinsella remarked, highlighting the challenges faced by many small business owners.
-
Scenario Analysis
As the Bank of England approaches its August meeting, the decision on interest rates remains finely balanced. The rising unemployment rate and slowing wage growth suggest a need for economic stimulus, yet the unexpected inflation spike complicates this narrative. Should the Bank proceed with a rate cut, it will need to justify its decision amid inflationary concerns. Meanwhile, businesses and consumers alike will be watching closely, as any changes in monetary policy could significantly impact economic recovery and stability. The coming months will be critical in determining whether the UK can navigate these economic challenges without slipping into recession.
The UK's labour market is showing signs of strain as unemployment rates climb and wage growth decelerates, according to recent data from the Office for National Statistics (ONS). The unemployment rate increased to 4.7% in the three months leading to May, the highest level in four years. This rise in joblessness coincides with a slowdown in wage growth, which fell to 5%, a development that could influence the Bank of England's upcoming interest rate decisions.
Inflation and Interest Rate Dilemmas
The unexpected rise in inflation to 3.6% has added complexity to the Bank of England's monetary policy strategy. While the central bank had been considering interest rate cuts to stimulate the economy, the inflation surge presents a challenge. Former Bank of England rate setter Andrew Sentance described a potential rate cut as "irresponsible" given the current inflationary pressures. Nevertheless, many economists, including Yael Selfin from KPMG UK, suggest that the slowing wage growth opens the door for a rate cut in August.
Job Market Weakness and Economic Inactivity
The UK job market continues to weaken, with the number of vacancies dropping to 727,000, marking the 36th consecutive month of decline. This trend reflects a broader economic slowdown, with firms hesitant to hire or replace departing employees. Despite a slight improvement in economic inactivity rates, long-term sickness remains a significant issue, accounting for 39.3% of those not in the workforce.
Business Impact and Individual Stories
Businesses across the UK are feeling the pressure of rising costs and a sluggish economy. Peter Kinsella, owner of two Spanish restaurants in Liverpool, describes the current period as the toughest since the 2008 financial crisis. He has been forced to reduce staffing hours and delay investments to manage expenses. "We're managing, but by the skin of our teeth," Kinsella remarked, highlighting the challenges faced by many small business owners.
What this might mean
As the Bank of England approaches its August meeting, the decision on interest rates remains finely balanced. The rising unemployment rate and slowing wage growth suggest a need for economic stimulus, yet the unexpected inflation spike complicates this narrative. Should the Bank proceed with a rate cut, it will need to justify its decision amid inflationary concerns. Meanwhile, businesses and consumers alike will be watching closely, as any changes in monetary policy could significantly impact economic recovery and stability. The coming months will be critical in determining whether the UK can navigate these economic challenges without slipping into recession.
