UK Labour Market Weakness and Its Implications for Bank of England Policy and British Assets

The UK labour market is showing signs of strain, with rising unemployment, declining employment rates, and a mismatch between official data and real-world trends. These developments are reshaping expectations for Bank of England (BoE) policy and could trigger a rate cut by year-end 2025. For investors, the implications extend beyond monetary policy, influencing equity valuations, bond yields, and the pound's stability.

Labour Market Deterioration: A Catalyst for Policy Shifts

According to a Resolution Foundation report, the UK unemployment rate rose to 4.7% in Q3 2025, with some estimates suggesting it may have climbed to 5.0% by late September. This 0.5 percentage point annual increase reflects weakening private sector pay growth and a decline in employment rates, as noted in a Guardian live update. Administrative payroll data reveals a drop in payrolled employees since October 2024, while the Labour Force Survey (LFS) lags in capturing this trend, as the Resolution Foundation notes. The Resolution Foundation further notes that the inactivity rate is likely rising, contradicting official data that suggests a decline.

These dynamics signal a loosening labour market compared to pre-pandemic and 2024 levels, as evidenced by falling vacancies and reduced hiring difficulties, according to the Resolution Foundation. However, wage growth remains stubbornly high at 4.6% year-on-year (excluding bonuses) as of September 2025, as reported by the ONS, creating a paradox where slack in the labour market coexists with inflationary pressures.

BoE Policy in a Tightrope Scenario

The BoE's Monetary Policy Committee (MPC) has maintained the Bank Rate at 4% in November 2025, despite a split vote-five members favored no change, while four supported a 0.25 percentage point cut, according to the BoE's interest rate decision. This hesitation reflects the central bank's struggle to reconcile slowing inflation (CPIH at 4.1% in August 2025, as noted in the ONS inflation data) with persistent wage growth.

Market expectations for a December rate cut are intensifying. The Resolution Foundation and Reuters analysis highlight that the BoE is under pressure to act as unemployment rises and employment rates fall, according to the Guardian live update. A cut would align with the broader trend of global central banks easing policy amid softening demand. However, the BoE's recent focus on mortgage market stability-freezing rates to protect homeowners-suggests caution, as noted in a MPA article.

Asset Class Implications: Equities, Bonds, and the Pound

Equities: A rate cut would likely boost equity valuations by reducing discount rates and improving corporate borrowing costs. However, the weak labour market poses a dual threat: slower economic growth could dampen earnings, while rising inactivity rates might signal a less dynamic workforce, according to the Resolution Foundation report. Sectors tied to consumer spending, such as retail and hospitality, could benefit from lower rates but face headwinds from higher unemployment.

Bonds: UK government bond yields (gilts) have already fallen in anticipation of easing policy, with the 10-year yield dropping below 4.405% in early November 2025, as reported by CNBC. A rate cut would likely drive yields lower, particularly for shorter-dated gilts, as investors seek safe-haven assets amid economic uncertainty.

Currency: The pound has weakened against the dollar and euro by 0.3% and 0.4%, respectively, reflecting concerns about the UK's economic outlook, as CNBC reported. A rate cut would likely exacerbate this depreciation, increasing import costs and inflationary pressures-a classic policy trade-off.

Conclusion: Navigating the BoE's Tightrope

The UK's labour market is at a crossroads, with rising unemployment and slowing wage growth creating a compelling case for a December rate cut. While such a move could stabilize the economy and support asset prices, it risks prolonging inflationary pressures. Investors must weigh the BoE's balancing act between inflation and employment, with a particular focus on how policy shifts will ripple through equities, bonds, and the pound.

As the BoE finalizes its decision, market participants should monitor the Resolution Foundation's labour market outlook, as noted in the Resolution Foundation report, and the MPC's communication for clues about the timing and magnitude of policy easing.