UK average earnings, excluding bonuses, rose 4.2% in the three months to December versus a year earlier. This matched forecasts.
This measure tracks pay growth over a rolling three-month period. The rate reported for December was 4.2%.
Wage Growth Still Too High
Average earnings for December 2025 came in as expected at 4.2%, but that is not necessarily good news. Wage growth at this level is still too high for the Bank of England to be comfortable about long-term inflation. It supports the view that rate cuts in 2026 will be gradual and cautious.
This is more worrying when set against last week’s January 2026 inflation reading, which edged up to 3.1%. Many expected inflation to keep falling, so the rise was a surprise. With the Bank Rate unchanged at 4.75% since last summer, markets are now scaling back the chances of a rate cut before the third quarter. Similar stubborn wage growth through 2025 was a key reason the Bank of England paused its rate-cutting cycle.
In FX markets, this strengthens the case for the pound versus currencies backed by more dovish central banks. We see value in near-term GBP/USD call options, as the UK–US rate gap may widen in sterling’s favour. GBP/USD has also held support around 1.2850, which offers a clear reference point for these trades.
For equity traders, the message is more cautious for the UK-focused FTSE 250. If borrowing costs stay higher for longer, it can squeeze profits and cap growth. One approach is to use futures to set short positions, or to buy put options as a hedge against a potential pullback in the coming weeks.
The clearest opportunity may be in rates. We expect short-sterling futures to remain under pressure. The implied yield on the December 2026 contract is already up 20 basis points this month, and it could rise further as markets accept that rate cuts are not close.
Rates Market Implications
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