UK unemployment hits highest level since 2021 – will interest rate cuts follow?

Male and female programmer engineer use AI software on laptop computer, meeting discussion at home office. — (Image credit: Getty Images - Kindamorphic)

The UK's unemployment rate climbed to 5.2% in the three months to December 2025, according to the Office for National Statistics – up from 5.1% in the three months prior to that. Vacancies also remained flat and workers on payroll fell, too.

The data also showed wage growth has slowed to 4.2%.

The market is undeniably looking gloomy. In part, you could point the finger at chancellor Rachel Reeves and the policies in the Autumn Budget both in 2024 and 2025, as the cause of businesses slowing down with recruitment over the Christmas period and stalling on hiring plans for 2026. Minimum wage increases and higher employer National Insurance Contributions have added to costs, forcing many employers to cut back on staff and avoid backfilling roles.

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Unemployment and AI

But there is another reason why the UK labour market could be slowing – artificial intelligence (AI), which is undeniably adding to uncertainty employers face today.

Earlier this month, speaking to the Financial Times, Mustaf Suleman, CEO of Microsoft, warned that desk-based jobs were at most risk from AI and that human-level performance tasks which involve someone sitting down at a computer will be taken over by AI in the next 18 months or so.

He said jobs in accounting, legal, marketing, and even project management were potentially at highest risk.

According to Morgan Stanley research, the UK is losing more jobs to AI than elsewhere across the globe.

Morgan Stanley claimed AI has now shifted from experimental technology to a functional driver of business strategy. Of the sectors it looked at, companies saw an 11.5% increase in productivity and 4% decline in headcount over the last 12 months.

While it is not clear that unemployment rates are directly related to AI, it is clear that AI is causing disruption in the Labour market and today’s increase in unemployment may just be the start to more disruption and uncertainty.

It is not good news for the economy that is still battling inflation and in uproar over taxes.

Last year, Andrew Bailey, the governor of the Bank of England, told BBC Radio 4 that the widespread adoption of AI “is likely to displace people from jobs in a similar way seen during the Industrial Revolution”.

Where next for interest rates?

With a weaker labour market, for now, Bailey's task is to bring stability back to the economy and as such interest rate cuts could well be on the cards.

In the last meeting, the Bank of England’s Monetary Policy Committee (MPC) decided to keep the base at 3.75%, but it’s likely that members will vote in favour for a cut in March 2026 as the labour market softens, which has been a key concern.

But how the MPC vote next month could also be determined by tomorrow’s inflation figures.

With the economy under pressure, some experts, such as the Trades Union Congress, have called for quick fire cuts to help give households and businesses a much needed confidence boost.

See our article on what the experts are saying about the next interest rate cut.

Kalpana is an award-winning journalist with extensive experience in financial journalism. She is also the author of Invest Now: The Simple Guide to Boosting Your Finances (Heligo) and children's money book Get to Know Money (DK Books).

Her work includes writing for a number of media outlets, from national papers, magazines to books.

She has written for national papers and well-known women’s lifestyle and luxury titles. She was finance editor for Cosmopolitan, Good Housekeeping, Red and Prima.

She started her career at the Financial Times group, covering pensions and investments.

As a money expert, Kalpana is a regular guest on TV and radio – appearances include BBC One’s Morning Live, ITV’s Eat Well, Save Well, Sky News and more. She was also the resident money expert for the BBC Money 101 podcast .

Kalpana writes a monthly money column for Ideal Home and a weekly one for Woman magazine, alongside a monthly 'Ask Kalpana' column for Woman magazine.

Kalpana also often speaks at events. She is passionate about helping people be better with their money; her particular passion is to educate more people about getting started with investing the right way and promoting financial education.