UK unemployment figures put pressure on Reeves

British assets were volatile in Tuesday morning trading as investors weighed the economic impact of a weak labor market ahead of a key Budget and the final interest rate decision this year.

The country’s unemployment rate rose more than expected to 5% in the three months to September, data released by the Office for National Statistics (ONS) on Tuesday showed. Meanwhile, estimated paid employment in the UK fell by 32,000 between August and September.

By 11:20 a.m. London (6:20 a.m. ET), yields on British bonds (known as gilts) had fallen significantly across the curve. Benchmark yield 10 pension It fell more than 5 basis points to 4.405% as hopes for a year-end interest rate cut by the Bank of England increased.

Bond yields and prices move in opposite directions. Britain has the highest long-term government borrowing costs of any G7 country, with its 30-year government bonds trading well above the key benchmark of 5%.

of british poundMeanwhile, against the US dollar, it fell 0.3%, trading 0.4% lower at $1.313. against euro.

Sanjay Raja, Deutsche Bank’s chief UK economist, said in a note after the release that Tuesday’s data release should give the Bank of England’s Monetary Policy Committee confidence to cut key interest rates later this year.

“Labor market slack continues to grow, surprising even market expectations,” he said. “While budget uncertainty may hamper employment plans for Q4-2025, one thing is clear: today’s data should continue to strengthen the case for a Christmas rate cut.”

Financial markets are currently pricing in a 75% chance of a rate cut at the Bank of England’s December meeting, according to LSEG data.

Mr. Raja pointed out that Deutsche Bank, like the Bank of England, had expected the unemployment rate to rise to 4.9%.

“The big picture is that, barring any corrections, today’s data tells us two things: one, there is further loosening in the labor market, perhaps even more so than the MPC assumed in its November forecast, and two, wage momentum continues to slow,” he said.

“Today’s data should give the majority of the MPC further confidence that weakness in the labor market will lead to weaker wage momentum, ultimately spilling over into inflation in the coming months and quarters.”

Grant Slade, UK economist at Morningstar, agreed that Tuesday’s figures provide further evidence that slack continues to build up in the economy, making lower interest rates more likely.

“The UK’s disinflationary process remains alive and well and we expect further interest rate normalization in 2026,” he told CNBC in an email.

British inflation reached 3.8% in October, lower than expected but still significantly above the Bank of England’s 2% target. The central bank kept interest rates unchanged at its November meeting.

Julian Howard, chief multi-asset investment strategist at GAM Investments, told CNBC that the shape of the UK labor market is putting further pressure on Chancellor of the Exchequer Rachel Reeves as the crucial autumn budget approaches.

“Today’s unemployment figures are putting increasing pressure on both the government and the Bank of England to change course and ease tax increases and interest rate cuts respectively,” he said. “But neither is easy. The government must somehow rebuild this country’s dire financial situation without strangling the souls of animals.”

Mr. Reeves is scheduled to deliver his fall budget on November 26, and is widely expected to break his campaign promise not to raise taxes on workers.

He has been under continued pressure since last year’s Budget, when he announced strict rules that limited the government’s spending and borrowing maneuverability. Under her fiscal rules, day-to-day government spending must be financed by tax revenue rather than debt, and she has also pledged to ensure that public debt as a share of economic output falls by 2029-30.

Local media reports say the finance minister is considering various ways to shore up public finances, from taxing dividends to imposing higher taxes on certain professions.

“Income tax, pensions, ISAs and housing are all subject to this, but the challenge is that putting pressure on them will have varying degrees of negative impact on consumption and businesses,” Mr Howard warned.

“With unemployment now rising, economic fragility will only be further accentuated, forcing the government to go against widely held economic principles and impose tax increases on a weak economy.However, given that welfare reform is off-the-plan, there is no obvious political alternative.”

The ruling Labor Party’s attempts to cut Britain’s welfare bill earlier this year ran into a backlash from its own MPs, forcing the government to water down planned cuts to plug a multibillion-pound hole in the government’s coffers.

GAM’s Howard said of financial market reaction on Tuesday: “Markets appear to be logically pricing in a weaker growth story and the potential for lower interest rates over time on the back of weaker cable markets and (lower) 10-year gold yields.”

“The obvious assumption is that the budget will continue regardless and growth rates will need to be adjusted downwards accordingly.”