Traders are increasingly anticipating a rise in UK interest rates to 5 percent by the end of 2027 following official employment data that showed a surprising decline in unemployment alongside a modest uptick in wage growth. The latest figures from the Office for National Statistics (ONS) indicate that a near-term rate increase, likely from 3.75 percent to 4 percent in November, is almost certain.
UK unemployment fell to 4.7 percent in the three months ending in August, the lowest level since July of the previous year and down from 4.9 percent the month before. Pay growth also improved slightly, rising from 3.6 percent to 3.7 percent, surpassing expectations. Despite these positive signals, the labor market continues to show signs of strain, with job vacancies dropping to 691,000 — the lowest number recorded in 12 years outside of the pandemic period. This decline reflects challenges faced by small businesses, which are curbing hiring due to rising operational costs.
The mixed employment data has influenced market sentiment about the Bank of England’s forthcoming policy decisions. Bank officials, preparing for a meeting in two weeks, are evaluating whether to raise interest rates amid persistent inflation pressures, partly attributed to the ongoing conflict in Iran. The officials will assess the labor market’s capacity to withstand higher borrowing costs and consider if inflation is translating into accelerating wage demands.
Economists are divided on the outlook. Matt Swannell, chief economic adviser at the ITEM Club, described the data as a potential sign that the labor market’s deterioration may be leveling off. In contrast, Rob Wood, chief UK economist at Pantheon Macroeconomics, cautioned that the Bank must remain vigilant regarding wage growth, which appears to be gaining momentum. Wood anticipates rate increases in both November and February and notes an increased risk of further tightening measures in 2027.
Currency markets have responded to this evolving economic picture, with the pound strengthening nearly one cent against the US dollar to around $1.34—its highest level in a month—and rising above £1.19 against the euro, reaching levels not seen since May 2025.
Looking ahead, inflation data due for release shortly is expected to show a rise to 3.4 percent in September, up from 3.1 percent in August. This figure will be closely monitored by the Bank of England as it weighs its next steps. Although the Bank has so far held off on matching recent rate increases by the US Federal Reserve and European Central Bank, remarks by Governor Andrew Bailey have indicated that the ongoing Iran conflict may compel a policy response. Meanwhile, Bank chief economist Huw Pill, an advocate for tightening, has expressed skepticism regarding the market’s expectations of multiple rate hikes in the near term.