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.
Speaking to MPs on the Treasury Select Committee, Bailey noted that while inflation has fallen faster than expected – prompting the Monetary Policy Committee (MPC) to cut interest rates to 4.75% earlier this month – the rise in employer taxes announced in last month’s budget, one of the biggest uncertainties ahead.
Bailey explained that if higher labor costs lead to job losses, it could soften the labor market, necessitating a more gradual approach to lowering interest rates. “There are several ways in which the increase in employer national insurance contributions announced in the autumn budget could play out in the economy,” he said. “A gradual approach to lifting monetary policy restraint will help us observe how this plays out, along with other risks to the inflation outlook.”
His comments come amid growing concerns 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 charges will make job losses “inevitable”. Economists predict that up to 100,000 jobs could be lost over the next five years due to the increased financial burden on businesses.
Bailey also stressed that inflation within the UK services sector remains excessively high and is “incompatible” with the Bank’s target of reducing headline inflation to 2%. Official figures to be released tomorrow are expected to show a rise in the consumer price index (CPI) to 2.1% in October, driven by rising household energy bills.
Market traders are now adjusting their expectations, with many not expecting another interest rate cut until early next year.