A shock rise in unemployment and a drop in wage growth make the prospect of a key rate cut in March more likely, analysts say.
The weaker picture has also increased the chance that the base interest rate will fall to 3% at the end of this year.
Current labor market figures show that unemployment rose to a five-year high of 5.2%, while wage growth fell to 4.2% in the final quarter of last year.
The number of salaried employees fell by 130,000 in 2025 compared to the previous year
It is estimated that the number of vacancies increased in the three months to January.
AJ Bell, head of financial analysis Danni Hewson, said: “The surprise rise in unemployment exposes the weakness in the labor market that has led to the number of unemployed per vacancy reaching a new post-pandemic high.
“Businesses have been crystal clear that government policies that have increased labor costs have caused them to halt their hiring plans, potentially hastening another change that could have a huge impact on job creation in the coming years.
“Weaving AI into businesses to increase productivity is a positive step and could be the answer to a decades-old problem.
“But especially for young people, who are already struggling to get their first taste of work, AI could result in a shortage of entry-level positions.
“With more people looking for jobs and the number of jobs created remaining fairly stable, pressure on companies to boost wages has eased, with private sector wage growth reaching its lowest level in five years.
“The gloomy picture painted by recent UK growth figures and current evidence of a subdued labor market have increased the likelihood that the Bank of England will cut rates at its next meeting in March.
“It has also increased expectations that interest rates could reach a level of 3% by the end of the year.”
But Hewson points out that the figures are retrospective and that the slight increase in vacancies in the three months to January could indicate that the labor market could be recovering.
Bestinvest of Evelyn Partners personal finance analyst Alice Haine also believes the data has increased the chances of the Bank of England cutting rates.
She says: “A weakening labor market, softer inflation, sluggish economic growth and declining wage growth all strengthen the case for the BoE to implement another 25 basis point rate cut sooner or later.
“The markets are increasingly hopeful of a new step, perhaps as early as March.
“If that happens, it would mark the seventh rate cut since August 2024 and should further reduce borrowing costs.”