Key Takeaways

The UK labour market presented a complex picture at the end of 2025. Permanent staff placements fell for a 39th consecutive month in December, with the decline accelerating to its fastest pace in four months. This persistent hiring weakness is attributed to high costs, economic uncertainty, and the lingering impact of payroll tax rises. However, in a contradictory signal for the Bank of England (BoE), starting salaries for permanent roles rose at the strongest rate since May 2025, indicating firm wage pressures. This tension between a cooling jobs market and sticky pay growth complicates the BoE's interest rate path, forcing a cautious and data-dependent approach to further easing.

A Labour Market in Contradiction

The latest survey from the Recruitment and Employment Confederation (REC) and KPMG reveals a UK jobs market caught in a tug-of-war. On one side, demand for labour continues to soften markedly. The 39-month streak of declining permanent placements is one of the longest on record, highlighting a deep-seated caution among employers. This isn't merely a cyclical blip; it reflects structural headwinds that are reshaping corporate hiring strategies.

Businesses are navigating a perfect storm of challenges: elevated borrowing costs following years of aggressive monetary tightening, persistently high operational expenses, and subdued economic growth forecasts. Adding significant weight is the payroll tax increase introduced in Chancellor Rachel Reeves’ 2024 budget, which continues to be cited by firms as a direct deterrent to expanding their permanent workforce. In this environment, the preference for temporary staff as a flexible, lower-commitment option persists, although even temporary billings declined in December, pointing to broader weakness in business confidence.

The Persistent Pulse of Wage Growth

In direct contrast to the hiring freeze, wage pressures have shown unexpected resilience. The acceleration in starting salary growth to its fastest pace in seven months is a critical data point. It suggests that while overall hiring is down, competition for workers with specific, in-demand skills remains fierce. Sectors like technology, engineering, and healthcare continue to experience talent shortages, forcing employers to offer premium pay to secure candidates.

This creates a significant complication for the Bank of England. Wage growth is a primary domestic driver of inflation. The fact that pay settlements are not cooling in line with broader labour market slack indicates that underlying inflationary pressures may be more entrenched than headline figures suggest. It's crucial to note, however, that the REC survey indicates this wage growth, while firm, remains below its long-run average. This nuance suggests we are past the peak of the wage-price spiral but are now in a phase of 'sticky' inflation that will be slow to dissipate.

What This Means for Traders

For traders in FX, bonds, and equities, this mixed labour market signal demands a nuanced strategy and close monitoring of incoming data.

  • Sterling (GBP) Outlook: Expect heightened volatility around UK data releases. Strong wage numbers will bolster the pound as they push back expectations for aggressive BoE rate cuts. Conversely, signs of a rapid deterioration in hiring or a rise in unemployment could trigger sterling weakness. Traders should watch for a potential divergence with other major central banks, like the Fed or ECB, whose labour markets may be cooling more uniformly.
  • UK Gilts and Rate Expectations: The market is currently pricing in only one or two additional 25-basis-point cuts from the BoE in 2026. This data supports that cautious outlook. Any surprise uptick in official Average Weekly Earnings data will likely cause a sell-off in short-to-medium-term gilts, pushing yields higher. Focus on the 2-year gilt yield as a key sensitivity indicator for near-term rate expectations.
  • Equity Sector Implications: Adopt a selective approach. Firms with high labour costs and low pricing power (e.g., certain retail, hospitality sectors) may see margins squeezed further. In contrast, companies providing temporary staffing solutions could see sustained demand as businesses opt for flexibility. Technology and specialised industrial firms may continue to perform well if they can pass on higher wage costs.
  • Trading the Data Duality: Develop scenarios. The base case is a 'cautious BoE' leading to a range-bound sterling. Prepare for breakout trades triggered by clear dominance of one data trend over the other. A scenario where hiring collapses and wage growth finally cracks would be decisively bearish for GBP and bullish for gilts. The opposite—resurgent hiring with strong wages—would force a major repricing of BoE hawkishness.

The Bank of England's Policy Tightrope

The December 2025 rate cut to 3.75% revealed a deeply divided Monetary Policy Committee (MPC). This latest data will only entrench those divisions. The 'hawkish' cohort will point to resilient wage growth as clear evidence that the battle against inflation is not yet won and that premature easing risks re-igniting price pressures. The 'dovish' faction will highlight the accelerating decline in permanent hiring, rising candidate availability, and falling vacancies as precursors to a sharper rise in unemployment, which would ultimately dampen wage growth and inflation more forcefully.

The BoE's stated path is one of data dependency, and this report provides conflicting data. The central bank is likely to place significant weight on upcoming official labour market statistics, particularly the unemployment rate and the more comprehensive Average Weekly Earnings index. They will be looking for conclusive evidence that the loosening in the jobs market is finally translating into softer pay settlements.

Forward-Looking Conclusion: A Year of Delicate Balancing

As we move through 2026, the UK economy is poised on a knife-edge. The labour market report underscores the central dilemma: the economy is cooling enough to warrant further support via rate cuts, but not so quickly or uniformly as to eliminate inflation risks. The persistence of wage growth in a softening market suggests the final leg of the inflation fight will be the most difficult.

For the Bank of England, this translates into a policy of very gradual, and likely intermittent, easing. The era of rapid, successive rate cuts is unlikely unless a sharp economic downturn materialises. Traders should anticipate a 'stop-start' easing cycle, with the BoE pausing frequently to reassess the impact of its previous moves. The ultimate trajectory for UK assets in 2026 will hinge on which force wins out: the gravitational pull of a cooling economy or the stubborn inertia of domestic wage inflation. Navigating this will require agility, a focus on high-frequency data, and an acceptance that the UK's post-inflation normalization path will be uniquely fraught.