UK Jobless Rate Peaks Since 2021: Rate Cuts Ahead?
The United Kingdom’s unemployment rate has risen to 5.2% over the three months ending December 2025, as reported by the Office for National Statistics. This marks an increase from the previous 5.1% recorded in the prior three-month period. Additionally, job vacancies have stayed stagnant, and the number of workers on company payrolls has also decreased noticeably.
Unemployment and AI
Beyond these headline figures, the latest data reveals that wage growth has decelerated to 4.2%, adding further pressure on the labor market. However, an emerging factor contributing to the slowdown in the UK job market is the rapid advancement of artificial intelligence (AI), which is introducing significant uncertainty for employers across various sectors.
Just a few weeks ago, in an interview with the Financial Times, Mustafa Suleyman, the CEO of Microsoft, highlighted the vulnerabilities of desk-based professions to AI disruption. He cautioned that tasks requiring human-level performance at a computer—those typically done while seated—could be largely automated by AI within the next 18 months. Suleyman specifically pointed to roles in accounting, legal services, marketing, and even project management as being among the most endangered.
Research from Morgan Stanley underscores this trend, indicating that the UK is experiencing a higher rate of job losses due to AI compared to other regions worldwide. The investment bank notes that AI has evolved from a mere experimental tool into a core element of business strategy. In the sectors analyzed, firms reported an impressive 11.5% boost in productivity alongside a 4% reduction in workforce numbers over the past year.
Although it’s challenging to draw a direct causal link between rising unemployment and AI adoption at this stage, the technology is undeniably reshaping the labor landscape. The recent uptick in unemployment figures might signal the beginning of broader disruptions and ongoing uncertainties in the job market.
These developments are particularly troubling for an economy still grappling with persistent inflation and heated debates surrounding taxation policies. Last year, Andrew Bailey, Governor of the Bank of England, remarked on BBC Radio 4 that the pervasive integration of AI could lead to job displacements reminiscent of those witnessed during the Industrial Revolution.
Where next for interest rates?
Faced with signs of a softening labor market, Andrew Bailey’s primary objective remains restoring economic stability. This scenario raises the possibility of interest rate reductions in the near term to support recovery efforts.
During its most recent policy meeting, the Bank of England’s Monetary Policy Committee opted to maintain the base rate at 3.75%. Nevertheless, analysts anticipate that committee members may support a rate cut when they convene in March 2026, given the evident weakening in labor market conditions—a factor that has been a persistent worry for policymakers.
The outcome of the next MPC vote could hinge significantly on the upcoming inflation data release scheduled for tomorrow. With mounting economic pressures, various experts, including those from the Trades Union Congress, are advocating for swift rate cuts to provide essential relief and instill greater confidence among households and businesses alike.
As the UK navigates these challenges, the interplay between labor market dynamics, technological shifts like AI, and monetary policy decisions will continue to shape the trajectory of economic recovery and growth in the coming months.
