Top officials from the Bank of England (BoE) raised significant concerns on Tuesday regarding the potential impacts of tax increases from the new British government's budget on inflation and interest rate policies.
Governor Andrew Bailey highlighted that the budget, which raised taxes on employers, could increase employment costs and complicate the BoE's ability to predict consumer price movements. He reiterated that the BoE could not yet determine whether businesses would respond by cutting jobs, raising prices, or absorbing the costs.
Earlier this month, the BoE lowered its benchmark interest rate from 5% to 4.75% but simultaneously increased its inflation forecasts, largely due to the budget's implications. Bailey emphasized a cautious approach to monetary policy adjustments, noting that observing the effects of the budget would be critical.
Deputy Governor Clare Lombardelli expressed concerns about the upward risks to inflation, while other committee members discussed the potential for companies to leverage tax increases to justify price hikes. Current market expectations are for two to three rate cuts by the BoE by the end of 2025, down from earlier predictions of four cuts.