Worsening UK labour market bolsters Bank of England rate cut bets

By Andy Bruce and Suban Abdulla

LONDON (Reuters) -Britain's labour market cooled noticeably in the third quarter as the unemployment rate jumped and wage growth slowed, according to data on Tuesday that will bolster expectations for a Bank of England interest rate cut next month.

The unemployment rate rose to 5.0% from 4.8% - the highest reading since the three months to February 2021, figures from the Office for National Statistics showed.

Pay growth, excluding bonuses, slowed slightly to 4.6% in the three months to September compared with a year earlier, the ONS said. That was in line with a Reuters poll of economists that mostly expected regular annual wage growth of 4.6% for July-September, slightly weaker than an increase of 4.7% in the three months to August.

A separate measure of payrolls data provided by the tax office showed a 32,000 drop in October following a decline of the same size in September after a downward revision - noteworthy as more often the first estimate is revised higher.

The two months combined marked the biggest such drop since late 2020.

POUND DROPS AGAINST THE DOLLAR, GOVERNMENT BONDS RALLY

The pound dropped against the dollar and British government bonds rallied, as the data aligned with the Bank of England's insistence on clearer signs of easing inflation pressure before proceeding with another rate cut.

Finance minister Rachel Reeves, who is readying her November 26 budget, will also be hoping for a further easing in borrowing costs, but will also be wary about a weakening jobs market.

"The UK labour market is weakening on all fronts," said Nye Cominetti, principal economist at the Resolution Foundation think tank.

The risk was that this turned out to be more than a blip caused by tax rises on employers that took effect in April, Cominetti added.

"The Chancellor should aim to protect workers from more pain in her upcoming budget and avoid adding further costs to employers."

PAVING WAY FOR BOE DECEMBER RATE CUT

The Bank of England kept rates on hold last Thursday, but a narrow vote and signs that Governor Andrew Bailey might soon join those seeking a cut boosted the prospect of a move in December once the government's budget has been unveiled.

While the unemployment data are still subject to concerns over their quality, the figures nonetheless added to signs of a cooling labour market.

Other surveys published on Tuesday showed easing grocery price inflation and a weakening in consumer spending trends.

Wage growth excluding bonuses in the private sector - a key metric for the Bank of England - cooled to 4.2% in the three months to September, as the central bank had predicted in forecasts published at the start of the month.

It was the weakest reading since the three months to February 2021.

Interest rate futures on Tuesday pointed to 65 basis points of Bank of England rate cuts by the end of next year, up from 55 bps on Monday.

"Evidence of a further cooling in pay pressures removes one potential roadblock to a pre-Christmas rate cut as well as increasing the chances of further rate cuts in 2026," said Martin Swannell, chief economic adviser to the EY ITEM Club consultancy.

(Reporting by Suban Abdulla and Andy Bruce, graphic by Sumanta Sen; Editing by Sarah Young, Kim Coghill and Conor Humphries)