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The Bank of England should approach interest rate cuts with caution as it assesses the impact of increases in employers’ national insurance contributions, says Andrew Bailey.
There are “different ways” in UK Chancellor Rachel Reeves’ decision to increase employers’ national insurance payments, which she announced last month in the Budget, may be implemented, the BoE governor said on Tuesday.
“A gradual approach to the removal of monetary policy restrictions will help us observe how this happens, along with other risks to the inflation outlook,” said Bailey in a report to the House of Commons Treasury selection committee, arguing that it will take time to evaluate the ramifications.
Forecasts from the BoE released this month suggest that the Budget will bring higher growth and inflation in the short term, dampening hopes for a quick rate cut. Consumer price inflation will run at 2.7 percent in the final quarter of 2025 – higher than the previous forecast of 2.2 percent, the BoE said.
It will fall below the 2 percent target only in mid-2027, a year later than the BoE’s Monetary Policy Committee expected in August.
Bailey on Tuesday said he saw risks in both directions on inflation, although he said progress in reducing inflation was faster than the BoE had hoped.
His testimony did not suggest that the governor is looking at a further quarter reduction as soon as next month’s meeting.
Part of the uncertainty is about the impact of the £26bn increase in national insurance contributions. The extra costs can be passed on through higher consumer prices, or companies can absorb them with lower margins, by increasing productivity, or by offering smaller pay raises or laying off workers.
The new data also gave Bailey “reason for reflection”, the governor said.
Next year’s expectations for corporate wage growth in a panel survey of bank decision makers have stabilized at a higher level of 4 percent in recent months, for example.
Other data also pointed to a relatively tight labor market, indicating “a persistent persistence in wage pressures beyond what we assumed in our projections”.
Speaking at the same hearing, Alan Taylor, the MPC’s newest member, struck a more dovish note on the policy outlook. He said that market prices indicate a rise of about four quarter points in the next year, and this pace is consistent with the idea of ​​gradualism.
“If the situation is weaker, and my own view is tilted to the downside risk now rather than the upside risk about a year ago, we can go faster,” he said.
Clare Lombardelli, the BoE’s deputy governor for monetary policy, said that there was a decline in service inflation as well as wages, and on top of what happened to the price of goods, this showed the inflationary driver was “less strong than in the past”.
But he insisted he still saw “risks on both sides”, stressing he would be “cautious” about upcoming data, including a pay survey by the BoE’s network of regional agents.
Asked about the risk of fragmentation in the global trading system, Bailey urged Britain to engage in an “active dialogue” on trade with President Donald Trump’s administration and Brussels, adding that it should not choose between them.
Bailey said it was too soon to tell how the next US government’s policies would affect the UK, because “we really don’t know what they’re aiming for”.
But Bailey told the committee: “Free trade is not about favoring one region over another. . . . We need to approach all regions of the world as places where we trade.
He points out this means implementing the post-Brexit settlement with the EU in the best possible way. “I find it difficult to understand people who say that we should implement Brexit in the least possible way.”
