Business tax rises make future interest rate cuts uncertain, says Bailey

The introduction of higher national insurance tax on employers poses “uncertainty” for future interest rate cuts, the governor of the Bank of England has warned.
Andrew Bailey told MPs on the Treasury select committee that inflation had fallen faster than expected recently, prompting the monetary policy committee (MPC) to cut interest rates for the second time this year earlier this month to 4.75 per cent.
However, he warned that the increase in employers’ national insurance contributions (NICs) announced in last month’s budget was “one of the biggest uncertainties ahead”.
If it raised the cost of employment and led to job cuts, it would soften the labour market and force the Bank to lower rates “gradually”, he said.
“There are different ways in which the increase in employers’ national insurance contributions announced in the autumn budget could play out in the economy,” Bailey said. “A gradual approach to removing monetary policy restraint will help us to observe how this plays out, along with other risks to the inflation outlook.”
His warning came after major retailers wrote to the chancellor Rachel Reeves warning that shops will close, jobs will be lost and prices will have to rise because of her decision to raise employers’ NICs in the budget. Economists estimate that future job losses will be in the range of 80,000 to 100,000 over the next five years.
More than 70 companies including Tesco, Marks & Spencer, Sainsbury’s, Asda and Next have written to Reeves saying that the “sheer scale” of new costs on businesses means that job losses are “inevitable”.
Bailey said that inflation in the UK’s services sector also remained too high and “incompatible” with bringing prices back to 2 per cent.
Official inflation figures released tomorrow are expected to show an uptick in the consumer price index (CPI) to 2.1 per cent in October due to rising household energy bills.
Traders are not expecting another monetary loosening until early next year.