The Bank of England held interest rates at 4.75 per cent today, while downgrading economic forecasts for the UK towards stagnant growth.
Only six members of the Bank’s Monetary Policy Committee voted to keep interest rates steady, less than had been expected, as three voted to cut rates by 0.25 per cent citing fears over a weaker economy.
The Bank slashed UK growth forecasts for the last quarter of 2024 to zero, down from its estimate last month of a 0.3 per cent rise. GDP fell by 0.1 per cent in both September and October.
“The prospective increase in labour costs from higher National Insurance contributions from next April, announced in the Budget, is currently weighing heavily on sentiment,” the Bank said.
Companies are considering cutting their headcount, accelerating investment in automation, and offshoring labour to deal with the National Insurance hike, it added.
Despite sour prospects for growth, fears over inflation continue to plague the Bank, as it stated that early reactions to the Budget suggested a “risk of greater upward pressure” on inflation than previously thought.
Provisions introduced in the Budget are expected to “push prices up – notably for the food and drink, hospitality, leisure and care sectors – and CPI inflation higher next year”, it said.
Meanwhile, forecasted increases in pay for next year were raised to three to four per cent, up from two to three per cent in the previous estimates.
The news came following higher-than-expected earnings data from the Office for National Statistics earlier this week, which came in at 5.4 per cent, compared to the 4.6 per cent forecast by markets.
Inflation data, also released earlier this week, revealed that prices had increased by 2.6 per cent throughout November, up from 2.3 per cent in October.
The Bank expected inflation to continue to tick up in the near term, with the Budget expected to up the rate of price increases by 0.5 per cent.
“We think a gradual approach to future interest rate cuts remains right, but with the heightened uncertainty in the economy, we can’t commit to when or by how much we will cut rates in the coming year,” governor Andrew Bailey said.
One member of the Bank’s Monetary Policy Committee who voted to hold rates went as far as to say that the evolution of inflation “could warrant an activist strategy”.
Chancellor of The Exchequer, Rachel Reeves said: “I know families are still struggling with high costs. We want to put more money in the pockets of working people, but that is only possible if inflation is stable and I fully back the Bank of England to achieve that.
“Improving living standards across the country is our number one focus, and is why I chose to protect working people’s pay slips from tax rises, froze fuel duty and increased the National Living Wage for 3 million people.”