Inflation falling in January, combined with higher unemployment has fuelled expectations that the base rate could come down in March.
UK inflation fell to 3% in the year to January, down from 3.4% in December, according to figures published on 18 February by the Office for National Statistics.
The decline was widely expected and was driven partly by lower costs for meat, petrol and airfares.
However, inflation remains above the Bank of England’s 2% target.
New figures published on 17 February revealed a sharper-than-expected rise in unemployment, alongside a slowdown in wage growth. This could strengthen the case for rate reductions in the coming months.
Unemployment at five-year high
The latest figures show:
- Unemployment has risen to 5.2%, the highest level in five years
- Wage growth slowed to 4.2% in the final quarter of last year
- The number of payrolled employees fell by 130,000 in 2025 compared with the previous year
- Vacancy numbers edged slightly higher in the three months to January
The combination of rising unemployment and softer wage growth suggests pressure in the labour market is easing.
Higher employment costs and business uncertainty have led many companies to pause hiring plans.
More competition for jobs
With more people competing for jobs and wage growth slowing – particularly in the private sector – the pressure on employers to raise pay has diminished.
Markets are now pricing in the possibility that the base rate could fall to around 3% by the end of the year. A weakening labour market, softer inflation and sluggish growth all support the argument for another rate cut soon. If it happens, it will mark the seventh rate reduction since August 2024 and would help ease borrowing costs further.
The base rate was held at 3.75% in the most recent review on 5 February. However, it was reduced from 4% to 3.75% in December 2025. It peaked at 5.25% in August 2023 but has been falling steadily since then.
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