UK private sector wage growth slows to 2.8% as unemployment holds at 4.9%

Labour market cooling across key measures

Official figures from the Office for National Statistics showed cooling conditions across the British labour market between April and July. The national unemployment rate remained at 4.9% in the three months to June, missing economist forecasts for a decline to 4.8%. The employment rate for people aged 16 to 64 was unchanged year-on-year at 75.1%, while the economic inactivity rate among adults aged 16 and over stood flat at 20.9%. Total employment fell by 71,000 in June compared to the same month in 2025, slipping by 4,000 compared to May. Open job vacancies declined to 707,000 in the three months to July, down by 4,000 from the three months to June and by 7,000 compared to the three months to April, reaching the lowest count since 2014 outside the pandemic period.

Vacancies remain broadly flat, though a small fall in the latest period puts them at the lowest level in more than five years.

Decelerating wage growth and employer caution

Wage growth data pointed to easing pay pressures across the private sector. Regular private sector pay growth slowed to 2.8% year-on-year in the three months to June, down from 2.9% in the prior period and marking the lowest rate since October 2020. Overall regular wage growth rose slightly to 3.5%, supported by scheduled NHS public sector awards. The Office for National Statistics noted that smaller enterprises reduced hiring activity due to rising labour costs and higher operating expenses, which were further compounded by energy costs and government wage adjustments for lower-paid staff. In addition, survey data from human resources analytics firm Brightmine revealed that median employer pay settlements fell to 3.2% in the three months to July, down from 3.3% in the prior three quarters.

The fact that more than a third of matched pay awards are now lower than last year does suggest some employers are becoming more cautious.

Rate-setter outlook and inflation considerations

The loosening employment figures have reinforced expectations that the Bank of England will hold its benchmark interest rate at 3.75%. In a Reuters survey of 64 economists conducted between 13 and 18 August, 56 respondents expected the Monetary Policy Committee to leave rates unchanged through the remainder of the year. Six economists projected a rate increase and two forecast a reduction. Three members of the nine-person committee had voted for an immediate increase to 4.0% at the July meeting. While crude oil traded at roughly $91 per barrel due to the closure of the Strait of Hormuz, economists from Morgan Stanley observed that weak hiring creates a barrier against second-round inflationary effects from energy prices. Official inflation was expected to rise from 2.6% in June to 2.9% in July.

Barring a severe and persistent spike in energy prices, we think the Bank (of England) will keep rates on hold until next spring, before cutting rates at least twice in 2027.

Currency and equity market movements

Financial markets registered declines following the release of the labour data. In London equity trading, the blue-chip FTSE 100 index fell 0.1% to 10,711.29 points, marking its seventh consecutive daily drop, while the midcap FTSE 250 index slipped 0.4% to 24,612.95 points. The British pound dropped 0.1% against the US dollar to $1.352, despite having climbed nearly 2% over the previous two months amid dollar weakness and joint US-Japan yen interventions in late July. Against the euro, sterling slipped 0.05% to 85.54 pence. Money markets continued to price in approximately 30 basis points of policy tightening before the end of the year.