‘To be clear, I expect bank rate to come down over time as the effects of the large shocks of the past continue to abate’
Bank of England’s deputy governor for financial stability, Sarah Breeden has forecasted that the UK’s rise in national insurance taxes will probably lead to lower staff wages in the “long run”.
Addressing the audience at the University of Edinburgh Business School, Ms Breeden also mentioned that businesses could cut jobs or hike prices as a reaction to increased tax burdens.
She said: “Businesses have many potential margins of adjustment to increased NICs (national insurance contributions). At one extreme, they might respond by passing the entire cost through into lower wages – indeed, this would be my assumption for where it ends up in the long run.”
She continued: “At the other extreme, they might seek to protect wages and increase prices, especially in the short term. They might also respond by reducing employment or by eating into their profit margins.”
She concluded by suggesting that outcomes would vary widely depending on “firms’ individual circumstances and overall levels of demand in the economy” and implied significant uncertainty surrounding these changes and their effect on medium-term inflation. “There is, therefore, uncertainty around what these shocks will mean for medium-term inflation,” Breeden said in her Thursday speech.
Prior remarks from the Bank of England revealed considerations regarding the impact of measures presented in the Government’s autumn Budget.
The Bank of England has issued a warning that the proposed hike in employer national insurance rates could impact future inflation. This comes as businesses indicate they might counter higher taxes by increasing prices or cutting jobs.
Ms Breeden noted “tentative signs” of a downturn in UK economic activity, with recent data showing a contraction in GDP for October. She emphasized her attention on the current slowdown and employers’ responses to increased employment costs as factors that could shape the trajectory of UK inflation.
“To be clear, I expect bank rate to come down over time as the effects of the large shocks of the past continue to abate,” she asserted.
