The pound wobbled and gilt yields dropped yesterday after worse-than-expected jobs figures raised hopes of a pre-Christmas interest rate cut.

Unemployment rose to 5 per cent in the three months to September, the Office for National Statistics said, higher than the 4.9 per cent expected by markets. 

The Bank of England had not expected the jobless rate to reach 5 per cent until the end of the year.

The figures bolstered bets that the Bank will cut interest rates in December from 4 per cent to 3.75 per cent.

The Bank’s Monetary Policy Committee only narrowly decided to leave rates on hold last week, having judged that inflation has now peaked. 

Traders see a three-in-four chance of a December cut – and a one-in-three likelihood of another rate reduction in February.

That sent sterling more than half a cent lower in early trading to just over $1.31, before bouncing back. It was also about half a cent lower against the euro at just above €1.13.

UK borrowing costs also fell, with the yield on two-year government bonds, known as gilts, falling to 3.73 per cent, the lowest since August last year.

Yields on benchmark ten-year gilts fell below 4.4 per cent and those on 30-year gilts fell below 5.2 per cent.

Francesco Pesole at ING Bank said: ‘We think the Budget’s tax hikes will provide the final argument for a cut in December.’