Britain's unemployment rate unexpectedly eased in the three months to April as pay growth remained stronger than economists anticipated

Britain's unemployment rate fell to 4.9 per cent in the three months to April, according to figures published by the Office for National Statistics (ONS) on Thursday.

It provides a modest boost ahead of the Bank of England's latest interest rate decision.

The reading was down from five per cent recorded in the previous quarter and came in better than economists' expectations that the jobless rate would remain unchanged at five per cent.

Pay growth excluding bonuses held steady at 3.4 per cent over the same period, surpassing forecasts of 3.2 per cent.

When adjusted for consumer price inflation (CPI), real earnings increased by 0.3 per cent.

Total pay including bonuses rose by 4.4 per cent, also beating market expectations of four per cent.

The figures were released just hours before the Bank of England is due to announce its latest interest rate decision, with policymakers widely expected to leave borrowing costs unchanged at 3.75 per cent.

Rate-setters have been closely monitoring developments in the labour market as they assess whether elevated oil prices linked to the conflict involving Iran could feed through into stronger wage demands.

Responding to the figures, Work and Pensions Secretary Pat McFadden said: “This month’s figures show that there are 400,000 more people in work than this time last year, but we know ongoing instability in the Middle East is causing uncertainty in our labour market.

“We have the right economic plan for growth and stability in a volatile world – and we are taking action to create opportunity and make sure that no one is left behind.

“We are pushing ahead with the biggest youth employment reforms in a generation to create almost a million opportunities for young people, boosting skills through our Youth Guarantee backed by a £2.5billion investment and supporting 300,000 disabled people through our Connect to Work programme to futureproof our workforce to help more people into work.”

Reacting to the figures, independent economist Julian Jessop said, "Even after some favourable revisions, the trend in payroll jobs is still down, with 119,000 fewer employees in May than in the same month a year earlier - and 187,000 fewer than two years ago."

Another concern for policymakers is whether softer demand for workers is limiting employees' bargaining power and reducing their ability to secure higher pay increases.

Most members of the Monetary Policy Committee believe labour market conditions have loosened compared with recent years, making significant wage increases less likely.

Following Russia's invasion of Ukraine in 2022, inflation peaked at 11.1 per cent and wage growth exceeded five per cent for almost three years.

Suren Thiru, chief economist at ICAEW, said: "These figures point to a jobs market struggling under the strain of soaring energy bills and employment costs, with more firms limiting hiring and holding down pay, especially for younger workers."

He said weaker wage growth would provide reassurance for policymakers by indicating that any inflationary spillover from the conflict involving Iran could remain contained.

Commenting on the implications for monetary policy, Mr Thiru said: "These figures seal the deal on a midday interest rate hold by reassuring rate-setters that a softening labour market can help keep this Iran-driven inflation shock short-lived by dampening demand across the economy."

He added that the Monetary Policy Committee's vote split and accompanying minutes could adopt a slightly more dovish tone.

The number of people claiming unemployment benefits rose by 31,200 in May, exceeding analysts' forecasts for an increase of 25,800.

Employment increased by 100,000 in the three months to April, down from 148,000 in the previous period but ahead of expectations for growth of 80,000.

Mr Thiru warned that falling job vacancies suggested demand for workers was weakening at an uncomfortable pace as businesses contend with mounting financial pressures and automation reshapes the labour market.

He said: "While the US-Iran peace deal has halted hostilities, the damage to the UK's labour market is already done."

Mr Thiru predicted that unemployment could rise towards six per cent if higher energy costs continue to weigh on employers' hiring plans.