The UK unemployment rate fell to 4.7 per cent in the three months to August, the Office for National Statistics said today, prompting traders to bet that the Bank of England will raise interest rates to 4 per cent next month.
The rate was down from 4.8 per cent and below the 4.9 per cent forecast by economists. The figures also showed higher overall employment, a fall in economic inactivity and stabilising wage growth.
Average weekly earnings excluding bonuses grew by 3.7 per cent, up from 3.6 per cent, against economists’ expectations of no change over the three-month period.
Traders are forecasting four interest rate rises over the next 12 months, including one in November, although policymakers at the Bank have pushed back on that forecast.
Private sector pay growth, which fell to a six-year low earlier this year, rose from 2.9 per cent to 3 per cent. The Bank watches the measure closely for signs that higher energy prices are spilling over into wages.
Monthly payrolls rose by 13,000 in September, against projections of a 15,000 fall. The ONS revised its August estimate from a fall of 26,000 to an increase of 1,000, and said the September figure was provisional and likely to be revised. Employment over the rolling three-month period rose by 102,000.
Other measures pointed to a jobs market that has been cooling gradually over the past two years, with rising unemployment, falling vacancies and soft private sector pay growth.
Vacancies fell by 21,000 to 691,000 in the three months to September, the largest quarterly fall since the start of the year, according to the ONS labour market overview. The statistics agency said the fall came mainly from smaller firms, which continue to indicate that they may not be recruiting because of increased labour costs.
Growth in total pay, including bonuses, slowed from 3.9 per cent to 3.7 per cent, its lowest rate since August to October 2020, the ONS said.
Earlier this month Novuna Business Finance reported that 26 per cent of small firms expect to grow in the final quarter of 2026. Jo Morris, its head of insight, said many owners were concerned about how tax, inflation and interest rate changes could affect their growth plans.
UK government bond yields rose after the figures were published, bucking the trend across European trading this morning. The yield on the ten-year gilt rose by 0.06 percentage points to 5.44 per cent, and the two-year gilt yield was 0.02 percentage points higher. Higher yields reflect expectations of tighter policy from the Bank.
Ellie Henderson, an economist at Investec, said the “data support our existing call that the monetary policy committee will collectively decide to increase the Bank rate by 0.25 percentage points at the next meeting in November, framing it as a ‘risk management’ move”.
May Rostom, chief UK economist at Citi, said: “We think the MPC will look at this print, in conjunction with the strong GDP data of late, and feel comfortable that the economy is looking resilient in the face of a potential rate hike in November.”
The Bank has held Bank Rate at 3.75 per cent throughout 2026, and the monetary policy committee’s next decision is due on 5 November. At its September meeting, three of the committee’s nine members voted to raise the rate to 4 per cent, while Andrew Bailey, the governor, said a rise would become more likely the longer energy price volatility persisted.
Some members of the committee have argued that the economy can tolerate its first interest rate rise in three years. A rise would bring the UK into line with central banks in the US and the eurozone, which have raised borrowing costs to reflect higher inflation since the US-Iran war.
Consumer price inflation, which stood at 3.1 per cent in August, is expected to rise to 3.4 per cent when figures for September are published tomorrow.
On Friday, Bailey said businesses were cutting costs and squeezing margins rather than passing higher energy bills on to customers.
Rob Wood, chief UK economist at Pantheon, said the Bank would probably take interest rates to 4.25 per cent in February, “while risks towards further tightening in 2027 have risen”.
Amy Ingham
Amy Ingham is a reporter at Business Matters, covering UK business news with a focus on breaking news, business policy, late payments and insolvency. She joined the magazine in 2026 after completing the NCTJ Diploma in Journalism at Harlow College's journalism school. Her recent reporting includes British Steel's nationalisation and its impact on SME suppliers, the decline in late payments by large firms, and Insolvency Service director disqualifications. Reach her at aingham@cbmeg.co.uk.
