National Insurance Hike Takes Greater Toll on Employment and Wages Than Forecast

The Bank of England’s governor has revealed that the recent increase in employers’ national insurance contributions is having a more severe impact on employment and wage growth than initially projected, suggesting potential further interest rate reductions this year.

Speaking at the British Chambers of Commerce, Andrew Bailey disclosed mounting evidence of companies responding to heightened payroll taxes by reducing their workforce, cutting vacancies, and implementing lower wage settlements. The labour market has already witnessed the loss of approximately 250,000 jobs over the past 12 months, with unemployment rising to a four-year peak of 4.6 per cent.

The cooling job market has prompted economists to anticipate an additional quarter percentage point interest rate cut in August. Financial markets are projecting two more rate reductions, potentially bringing the base rate down to 3.5 per cent by year’s end.

Consumer price inflation currently stands at 3.4 per cent, primarily driven by energy and utility costs. Bailey emphasised that service price inflation remains a crucial indicator for future inflation trends, currently elevated at 4.7 per cent according to May data.

The Bank’s approach to monetary policy continues to be cautious, with Bailey stating they will “retain a restrictive monetary policy stance to squeeze out remaining persistence in inflationary pressures.” This stance contrasts with the European Central Bank’s more aggressive rate cuts, where interest rates now sit at 2 per cent.

While the Bank of England maintains its gradual approach to monetary policy adjustment, Bailey stressed that decisions are not predetermined, noting that June’s meeting did not present a compelling case for a rate reduction. The ongoing economic indicators will continue to shape the Bank’s strategy in the coming months.