Patchy UK labour data strengthens case for BoE cuts

The latest Labour Market Overview published by the UK’s Office for National Statistics (ONS) on Tuesday morning has raised eyebrows, with some metrics seemingly having deteriorated quite rapidly versus last month. While we do not disregard these, overall we think UK labour market data is cooling off in a controlled manner, which is actually what the Bank of England (BoE) is looking for, and Gilt yields have unsurprisingly led Tuesday’s move lower across global rates markets.

The figure that gathered the most headlines was payrolled employees, which fell by 109,000 in May, the largest decline since the height of the Covid-19 pandemic in May 2020. This is a volatile number that the ONS only started publishing a short while ago, and it comes with the caveat that the numbers are in the “development” stage. For May, the ONS also pointed out that the cut-off date was earlier than usual, suggesting any subsequent revision might be even larger than normal. Still, the last time total UK payrolls grew versus the previous month was August 2024.

The ONS seems to have more faith in its Labour Force Survey (LFS), which has been widely criticised for poor response rates, stating: “LFS estimates from January to March 2025 include the full effect of recent improvements in LFS data collection and sampling methods introduced from January 2024 and are therefore more likely to be representative of labour market conditions.” The LFS shows a slightly better picture, with the total employment figures suggesting around 200,000 more people in employment than there were in August 2024. The LFS also has positive news on the inactivity level (the percentage of the working-age population not employed and not looking for a job), which has come down from just over 22% in late 2023 to 21.3% today, equivalent to 9.1 million people. These numbers are far from reassuring for the long run – the rate was closer to 20% in 2019/2020 – but they are nevertheless an improvement.

Unemployment increased marginally to 4.6%, with small increases in the number of employed (per the LFS) and unemployed, and a trivial reduction in the number of inactive people. This marks the highest unemployment rate since Q2 2021, with the number now a full percentage point above recent lows. Looking at wage data, these also show less pressure in the labour market. Average weekly earnings grew by 5.3% in the widely followed three-month over three-month year-on-year (YoY) calculation, undershooting the 5.5% Bloomberg consensus. If we look at the simpler YoY number based on April 2025 versus April 2024, wage inflation came in at 4.5%. Importantly, this is despite the rise in the National Living Wage in April.

We think these numbers suit the BoE. The central bank’s optimal scenario is one where the labour market loosens gradually but steadily, allowing wage inflation to normalise and clearing the way for further rate cuts, given the current policy rate at 4.25% is above neutral while growth is not particularly strong. Therefore, we agree with the market reaction of pricing in more rate cuts from the BoE, with two 25bp cuts in the remainder of the year being a reasonable estimate. The vote split, if there is one, at the next Monetary Policy Committee (MPC) meeting will be interesting. Two of the nine MPC members voted for no cut in May, while two voted for a 50bp cut, leaving a somewhat slim majority for the 25bp cut. We see little reason for the BoE not to cut rates after this latest employment data – an August cut looks likely and would be supportive for UK fixed income assets.