A deputy governor of the Bank of England said that the increase in employer’s national insurance contributions starting this April will likely cause a slowdown of wage growth over time.
Sarah Breeden, the Bank’s financial stability manager, stated that the cooling labour market made her no longer believe a resurgence of consumer price inflation in this year, especially as the government’s tax changes on NICs may have a negative impact on earnings growth.
Her comments revealed a division in the nine-strong monetary committee of the bank over the extent to which the increase in April in employers’ NICs, and the increased national living wage would result in higher prices. Some predict that businesses will pass costs on to consumers while others believe they will reduce hiring and employment. This will slow the jobs market, and set the stage for interest rate reductions.
Breeden, in a speech delivered on Thursday, said that the Bank will “gradually reduce” interest rates. However there is too much uncertainty about the impact of any new shocks such as budgets.
She said that the increase in employers’ national insurance taxes would lead to higher employment costs. Her stance on whether or not interest rates should be cut would partly depend on “the evidence about how employers respond to the still high level of growth in employment cost and what this means for inflation persistency”.
Breeden stated in her address at the University of Edinburgh: “Businesses can adjust to a higher NIC by adjusting their costs.” They could respond at one extreme by passing on the cost to lower wages. This is what I would assume will happen in the end.
She continued: “At one extreme, they may try to increase prices and protect wages, particularly in the short-term. The business could also reduce employment or cut their profit margins. “The reality will be somewhere in between and will depend on specific circumstances for each business.”
Breeden stated that, despite economic uncertainty, she is no longer concerned about an inflationary rise this year.
She said that “over the past year, headline inflation has been below our expectations due to global shocks abating more quickly than expected.”
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