Bank of England March Rate Decision: Rising Unemployment & Slowing Wages Shift the Outlook
Introduction
The Bank of England’s March Monetary Policy Committee (MPC) meeting is approaching at a delicate moment for the UK economy. While inflation remains above the 2% target, new labour market data may now begin to tilt the balance toward easing. Unemployment has risen to 5.2%, wage growth is slowing, and underlying economic momentum appears to be softening. The question is no longer simply whether the Bank holds rates — but whether labour market deterioration forces its hand later this year.
Labour Market Shift: Unemployment Rises to 5.2%
The UK unemployment rate has climbed to 5.2%, a notable increase compared to recent post‑pandemic averages, where unemployment had stabilised closer to the 3.8%–4.2% range. Historically, unemployment above 5% has often coincided with periods of economic slowdown or policy easing cycles. While 5.2% is not recessionary territory, it represents a clear cooling of labour market tightness — something the Bank of England watches closely.
Why This Matters for the Bank of England
For much of the past two years, the Bank has been concerned about labour market ‘tightness’ driving persistent inflation. A tight jobs market typically leads to upward wage pressure, which feeds into services inflation. However, a rising unemployment rate suggests slack is building in the economy. This reduces bargaining power, tempers wage growth, and lowers future inflationary pressure — precisely the dynamic policymakers have been waiting for.
Wage Growth Is Slowing — A Key Inflation Signal
Recent data also shows that wage growth is easing from prior highs. Wage growth has historically been one of the most important forward‑looking indicators for the Bank when assessing domestic inflation risks. When wage growth accelerates, the Bank fears second‑round inflation effects. When wage growth slows, inflation persistence typically weakens. If wage pressures continue to moderate alongside rising unemployment, the case for gradual rate cuts strengthens materially.
Comparing to Historic Policy Cycles
In previous tightening cycles, the Bank has often paused or reversed policy once labour market indicators softened meaningfully. The current 5.2% unemployment rate sits above the long‑term UK average of roughly 4.5%, signalling the economy may now be moving from overheating toward normalisation. If this trend continues over the next two quarters, the probability of rate reductions increases.
What This Means for March — and 2026
For the March meeting, the most likely outcome remains a hold. However, the tone of communication may shift more clearly toward easing. If unemployment continues to rise and wage growth slows further, markets may begin pricing earlier and more frequent rate cuts. For mortgage borrowers and property investors, this could translate into downward pressure on swap rates and gradually improving fixed mortgage pricing later in 2026.
Final Thoughts
The Bank of England has been waiting for clear evidence that inflationary pressure is subsiding sustainably. Rising unemployment to 5.2% and moderating wage growth may now provide that signal. While immediate cuts may not occur in March, labour market deterioration increases the likelihood that easing becomes more pronounced in the second half of the year. The policy debate is shifting — and investors should watch labour data just as closely as inflation prints.
