The rise in employers’ national insurance contributions from this April is likely to cause an overall slowing of long-term wage growth, a deputy governor of the Bank of England has said.
Sarah Breeden, who is in charge of financial stability at the Bank, said the cooling of the labour market meant she no longer thought a resurgence in consumer price inflation this year was likely particularly as government tax changes to NICs could push down on earnings growth.
Her comments acknowledged a split in the bank’s nine-strong monetary policy committee over how far April’s increase in employers’ NICs and the higher national living wage will result in higher inflation. Some forecast that companies will choose to pass on costs to consumers, while others suggest businesses will instead reduce hiring and employment, thus slowing the jobs market and create the conditions for interest rate cuts.
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In a speech on Thursday, Breeden said the Bank would “gradually” cut interest rates but there was too much uncertainty over the impact of new shocks to the economy such as the budget.
She said the employers’ national insurance tax rise would result in higher employment costs for businesses and her stance on the need for interest rate cuts would be partly determined by “the evidence around how employers are responding to the still-elevated level of growth in employment costs and what that means for inflation persistence”.
In her speech, at the University of Edinburgh, Breeden said: “Businesses have many potential margins of adjustment to increased NICs. 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 added: “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. The reality will sit somewhere between these extremes and will depend on the specific circumstances that each business finds themselves in.”
Breeden said that despite the economic uncertainty, she was no longer overly concerned about a sustained climb in inflation this year.
“Over the past year, headline inflation has come in below our expectations as global shocks abated more quickly than we expected,” she said.
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