4.2% Earnings Growth Is the Number the BoE Can't Ignore — Even as Unemployment Climbs

The ONS Labour Market Overview for February 2026 paints a deteriorating picture. The employment rate fell to 75.0% for October to December 2025 — down on the quarter and flat on the year. The early estimate for January 2026 puts payrolled employees at 30.3 million, down 134,000 (0.4%) compared to a year earlier and down 11,000 on the month.

Vacancies have flatlined at 726,000, barely moving from August to October. The Claimant Count hit 1.691 million in January 2026, rising month-on-month. These are not numbers that suggest a booming economy.

But zoom out. The Employer NIC hike that took effect in April 2025 — raising the rate from 13.8% to 15% and slashing the threshold from £9,100 to £5,000 — was always going to hit the jobs market. That's playing out exactly as predicted. The question isn't whether the labour market is weakening. It's whether it's weakening fast enough for the BoE to cut rates again.

Total average weekly earnings grew 4.2% in October to December 2025, matching regular earnings growth (excluding bonuses). In real terms, adjusted for CPI, that's 0.8% growth — workers are getting ahead of inflation, but only just.

The split between sectors tells the real story. Private sector regular earnings growth came in at 3.4% — actually approaching the range the BoE considers consistent with 2% inflation. But public sector regular earnings surged 7.2%, inflated by pay rises awarded earlier in 2025 than the previous year. The ONS itself flags this base effect, noting it "reached its peak last month and will phase out over the next few periods."

The MPC will look through that public sector distortion — to a point. But the headline 4.2% figure is what feeds into inflation expectations. With CPI inflation at 3.0% in January 2026 (down from 3.4% in December), the gap between earnings growth and inflation is narrowing. Real pay growth of just 0.5-0.8% hardly screams overheating. Yet 4.2% nominal growth, with inflation still a full percentage point above target, gives the MPC all the excuse it needs to sit on its hands.

The next ONS labour market bulletin lands on 19 March 2026, covering November 2025 to January 2026. Three things to watch:

1. Does earnings growth tick below 4%? The public sector base effect should start fading. If total regular earnings growth drops to 3.8-3.9%, it removes a key objection to a May rate cut. If it stays above 4%, the MPC will hold at 3.75% well into summer.

2. How bad are the January payroll numbers? The early estimate showed payrolled employees down 11,000 on the month. Revisions could make this worse — or flip it. January data is notoriously volatile because of seasonal patterns, but a further deterioration would intensify pressure on the BoE to act.

3. Vacancies: still flat or falling? A vacancy count dropping below 700,000 would signal that employers aren't just cutting heads — they've stopped looking for new ones. That's a leading indicator of deeper weakness ahead.

The Bank of England's current base rate of 3.75% has been in place since 18 December 2025, after four consecutive cuts from the August 2024 peak of 5.25%. The next MPC meeting is in May, and the Committee needs labour market data to have shifted materially before it will move again.

If you're waiting for rate cuts to cheapen your mortgage, the labour market data suggests patience is required. The BoE cut four times in 2024-2025 — from 5.25% to 3.75% — but the pace of cuts has slowed dramatically. The gap between the August and December 2025 cuts was over four months.

For savers, the picture is more nuanced. Real pay growth of 0.8% means most workers are marginally better off in purchasing power. But savings rates are tracking Bank Rate down — if you locked into a one-year fixed rate bond six months ago at 4.5%+, you made the right call. Today's best easy-access rates sit around 4.0-4.2%, and they'll fall further with each cut. For more on where to park cash now, see our savings guide.

For mortgage borrowers on trackers, every 0.25% cut saves roughly £25/month per £100,000 of outstanding debt. But fixed rates have already priced in expectations of further cuts — lenders offering two-year fixes around 4.3-4.5% are betting on Bank Rate reaching 3.25% by early 2027. If earnings growth stays sticky and the BoE pauses, those fixed rates could actually rise. Our mortgage guide breaks down the decision between fixing and tracking.

For investors, a higher-for-longer rate environment favours certain sectors. Banks benefit from wider margins, while rate-sensitive sectors like housebuilders and REITs stay under pressure. Our analysis of how BoE rate decisions affect your finances covers this in more detail.

The market consensus for two more cuts in 2026 assumes a clean trajectory: inflation falls to target, earnings growth moderates, the labour market softens enough to justify easing. But consensus is priced for a smooth landing that rarely materialises.

The Iran conflict is pushing oil prices higher, threatening to reverse the inflation progress of late 2025. Energy prices are the wild card — our coverage of how the Iran war affects energy bills explores this in detail. If Brent crude stays above $90, UK inflation could re-accelerate in Q2, making any rate cut in May politically impossible for the MPC.

Meanwhile, the Employer NIC hike is a slow-burn structural shift. Businesses are absorbing the cost through headcount reductions (hence falling payrolled employees) rather than wage cuts. That means unemployment keeps rising but earnings growth stays stubborn — the worst combination for the BoE.

My base case: one more cut in 2026, probably in August or September, taking Bank Rate to 3.50%. The market's pricing of 3.25% by year-end requires earnings growth to fall below 3.5% and CPI to drop below 2.5%. Neither looks likely before summer.

This article is for informational purposes only and does not constitute financial advice. You should consult a qualified financial adviser before making investment or borrowing decisions based on interest rate expectations.