Unlock Editor’s Digest for free

Roula Khalaf, editor-in-chief of the FT, selects her favorite stories in this weekly newsletter.

The Bank of England must approach interest rate cuts cautiously when assessing the impact of rising employer national insurance contributions, Andrew Bailey has said.

British Chancellor Rachel Reeves’ decision to increase employers’ social contributions, announced last month in the budget, could play out in “different ways”, the BoE governor said on Tuesday.

“A gradual approach to removing monetary policy restrictions will help us watch how this plays out, as well as other risks to the inflation outlook,” Bailey said in a report to the House of Commons Treasury select committee, arguing that it would take time to assess the ramifications.

The BoE’s forecasts released this month show it expects the budget to lead to higher growth and inflation in the short term, dampening hopes for rapid rate cuts. Consumer price inflation will stand at 2.7 percent in the final quarter of 2025, well above its previous forecast of 2.2 percent, the BoE said.

It will only fall below the 2% target in mid-2027, a year later than the BoE Monetary Policy Committee forecast in August.

Bailey said on Tuesday he saw risks in both directions when it came to inflation, although he reiterated that progress in reducing inflation had been faster than the BoE had expected .

His testimony did nothing to suggest that the governor believes another quarter-point reduction would be likely as soon as next month’s meeting.

Part of the uncertainty clouding the outlook concerns the impact of the £26 billion increase in national insurance contributions. The additional costs could be passed on through higher consumer prices, or companies could absorb them by reducing margins, increasing productivity, offering smaller pay increases or laying off employees.

Recent data also gave Bailey “reason to think,” the governor said.

Expectations for wage growth in companies for the coming year, according to the bank’s survey of decision-makers, have for example stabilized at a higher level of 4 percent in recent months.

Other data also points to a relatively tight labor market, indicating “a persistent persistence of wage pressures beyond what we assume in our projection.”

Speaking at the same hearing, Alan Taylor, the new MPC member, sounded a more conciliatory note on the political outlook. He added that market prices were pricing in rate cuts of about four-quarters of a point over the next year, and that pace was consistent with the notion of progressivity.

“If conditions are weaker and my view leans in favor of the current downside risks versus the upside risks of a year or so ago, we could move faster,” he said.

Clare Lombardelli, BoE deputy governor for monetary policy, said there had been a decline in services inflation as well as wages, and on top of what happened to goods prices , this suggests that the drivers of inflation are “less strong than they have been in recent years”. pass”.

But she stressed that she still saw “risks on both sides”, stressing that she would look “very carefully” at incoming data, including a salary survey carried out by the BoE’s network of regional agents.

Asked about the risks of fragmentation of the global trading system, Bailey urged the UK to engage in an “active dialogue” on trade with the administration of US President-elect Donald Trump and with Brussels, adding that it must not feel forced to choose between them.

Bailey said it was too early to say how the next US administration’s policies would affect the UK, given that “we literally don’t know what their intentions are”.

But Bailey told the committee: “Free trade is not about choosing one area over another. . . We should approach all regions of the world as places with which we trade.

He said this meant implementing the post-Brexit settlement with the EU in the best possible way. “I find it hard to understand people who seem to be saying we should implement Brexit in the most hostile way possible.”