By Miriam Mukuru and Renae Dyer

Yields on U.K. government bonds and sterling fell after weak U.K. jobs figures increased the prospect of the Bank of England cutting interest rates again, potentially as early as next month.

The U.K.'s unemployment rate unexpectedly rose to 5.2% in the three months through December, its highest level in nearly five years, figures from Britain's Office for National Statistics showed on Tuesday.

At the same time, wage growth also slowed, which should ease concerns among BOE policymakers about the risk of high earnings growth feeding through into inflation, particularly as unemployment is rising. Annual wage growth, excluding bonuses, fell to 4.2% over the final quarter of 2025 from 4.4% in September to November.

"This combination of subdued pay pressures and higher-than-expected unemployment strengthens market expectations of a potential rate cut in March," said Patrick Munnelly, a partner at broker Tickmill Group, in a note.

U.K. money markets priced an 80% chance of the BOE cutting interest rates by 25 basis points to 3.50% in March after the data, up from 65% previously, LSEG data showed.

Yields on U.K. two-year government bonds fell to an 18-month low of 3.551% after the data, according to Tradeweb. Ten-year U.K. government bond yields fell 3.2 basis points on the day to last trade at 4.362%.

Sterling fell to an 11-day low of $1.3549, and the euro rose to a one-week high of 0.8730 pounds in early European trade, LSEG data showed.

The central bank voted to leave interest rates unchanged earlier this month in an unexpectedly tight vote, with four out of nine policymakers preferring to reduce rates.

Tuesday's weak data could encourage some policymakers to switch to preferring lower rates, MUFG's head of research for global markets EMEA, Derek Halpenny, said in a note.

The attention now turns to U.K. inflation data on Wednesday, with analysts expecting price pressures to ease. Economists in a WSJ survey expect inflation eased to an annual rate of 3.0% in January from 3.4% in December.

"CPI data as expected tomorrow will reinforce our view of a March rate cut and keep the pound under downward pressure," Halpenny said.

Luke Bartholomew, deputy chief economist at Aberdeen, said weak inflation data on Wednesday could be decisive after another soft labor market report.

"The inflation data tomorrow could throw a wrench in the works, but for now it seems there is a clear case for a further rate cut at the Bank [of England]'s next meeting in March, and we continue to expect rates to fall to 3% later this year," he said.

Write to Miriam Mukuru at miriam.mukuru@wsj.com and Renae Dyer at renae.dyer@wsj.com

(END) Dow Jones Newswires

February 17, 2026 05:48 ET (10:48 GMT)

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