A shock rise in unemployment and a drop in wage growth make the prospect of a base rate cut in March more likely, analysts say.

The weaker picture has also increased the chances that base rate will fall to 3% by the end of this year.

Today’s job market figures show that unemployment has risen to a five-year high of 5.2% while wage growth dropped to 4.2% in the final quarter of last year.

The number of payrolled employees fell by 130,000 in 2025 compared to the previous year

Vacancy numbers are estimated to have nudged up in the three months to January.

AJ Bell head of financial analysis Danni Hewson says: “The surprise jump in unemployment lays bare the weakness in the labour market that’s led to the number of people out of work per vacancy hitting a fresh post-pandemic high.

“Businesses have been crystal clear that government policies which increased labour costs resulted in them pressing pause on their hiring plans, and potentially sped up another change which could have a huge impact on job creation in the years ahead.

“Weaving AI into businesses to increase productivity is a positive move and may be the answer to a decades-old issue. 

“But for young people in particular, already struggling to get their first taste of work, AI could result in a scarcity of entry-level posts.

“With more people hunting jobs and the number of jobs being created remaining fairly static, the pressure on businesses to ramp up pay has receded, with wage growth in the private sector hitting a five-year low.

“The gloomy picture painted by recent UK growth figures and today’s evidence of a lacklustre jobs market has increased the likelihood that the Bank of England will cut rates at the next meeting in March. 

“It has also increased expectations that rates could reach as low as 3% by the end of the year.”

But Hewson points out that the figures are backward-looking and the slight uptick in vacancy numbers in the three months to January may suggest the labour market could recover. 

Bestinvest by Evelyn Partners personal finance analyst Alice Haine also believes the data has hastened chances of the Bank of England cutting rates.

She says: “A weakening labour market, softer inflation, sluggish economic growth and easing wage growth all strengthen the case for the BoE to deliver another 25-basis-point interest rate cut sooner rather than later. 

“Markets are increasingly hopeful of another move, perhaps as early as March.

“If that happens, it would mark the seventh rate cut since August 2024 and should ease borrowing costs further.”