Bank of England Governor Andrew Bailey has warned that the recent increase in employers’ National Insurance contributions could create uncertainty about future interest rate cuts.
Addressing MPs on the Treasury Select Committee, Bailey noted that although inflation had fallen faster than expected – prompting the Monetary Policy Committee (MPC) to cut interest rates to 4.75% earlier this month – the tax hike would… Employers announced in last month’s Budget represent “one of the biggest uncertainties ahead”.
If rising labor costs lead to job cuts, that could weaken the labor market, necessitating a more gradual approach to lowering interest rates, Bailey explained. “There are different ways in which the increase in employer National Insurance contributions announced in the Autumn Budget could impact the economy,” he said. “A gradual approach to monetary policy deregulation will help us monitor how this plays out, along with other risks to inflation expectations.”
His comments come amid growing concern from the business community. More than 70 major retailers – including Tesco, Marks & Spencer, Sainsbury’s, Asda and Next – have written to chancellor Rachel Reeves, warning that the “sheer scale” of the new costs will make job losses “inevitable”. Economists expect the loss of up to 100,000 jobs over the next five years due to the increasing financial burden on companies.
Bailey also stressed that inflation within the UK services sector remains excessively high and “incompatible” with the bank’s target of returning overall inflation to 2%. Official figures due to be published tomorrow are expected to show the Consumer Price Index (CPI) rose to 2.1% in October, driven by an increase in household energy bills.
Market traders are now adjusting their expectations, with many not anticipating another interest rate cut until early next year.
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