Bank of England Rate Cut Hopes Dashed As Business Look to Hike Prices

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Firms indicate they will respond to the government's tax raid by raising prices, which will keep the 'doves' at the Bank of England in the minority.

The Bank of England will need to keep pressure on the economy as inflationary pressures look set to rise as the government's tax raid on businesses takes effect.

More than half of companies surveyed by the British Chambers of Commerce (BCC) said they plan to raise prices in the next three months as they face a "pressure cooker of rising costs and taxes".

According to the BCC 55% of firms now expect prices to go up in the next three months, with labour costs the biggest driver. Only 20% of businesses have increased investment in the past three months – 24% have decreased. Business conditions are weak, with only 24% of firms reporting increased cashflow and 30% a decrease.

"Firms of all shapes and sizes are telling us the national insurance hike is particularly damaging. Businesses are already cutting back on investment and say they will have to put up prices in the coming months," says Shevaun Haviland, Director General of the British Chambers of Commerce.

A separate report by KPMG finds the government's budget measures will come at the "cost of higher and more persistent inflation, as businesses pass on the cost of tax rises."

The government announced in October that it would raise National Insurance Contributions made by employers on employee wages. The threshold at which this payment is made has also been lowered, massively expanding the scope of the tax.

The National Living Wage employers pay will rise by more than inflation (6.7%) in 2025. The cost of employing a full-time worker on minimum wage will rise by £2,367 this year to more than £24,800 per person, with more than £5,000 of that going to the Treasury, according to a new analysis by the Centre for Policy Studies (CPS).

The CPS finds that 21.3% of the money businesses pay on employing minimum wage staff will now go to the Treasury in taxes, up from 17.5% last year.

For businesses to continue operating, they must increase their prices or let people go. This creates a conundrum for the Bank of England: the response to price acceleration would be to keep interest rates high, but the response to rising unemployment would be to lower rates, as rising unemployment is typically a deflationary phenomenon.

The Bank of England might find that in 2025 it sees both inflation and unemployment rise, giving it little other alternative than to cut at a steady one-a-quarter pace.

The BCC survey found nearly two-thirds of businesses were worried about taxes following the Budget, and overall business confidence has subsequently fallen to a two-year low.

Chancellor Rachel Reeves needs growth to pick up in order for the economy to generate the revenues required to fund her massive expansion in public spending.

The risk is that growth disappoints, leaving her with a significant budget shortfall.

The Labour Party's reflexive response to plugging funding gaps is to raise taxes, and the majority of economists surveyed by the FT at the start of 2025 think the government will initiate another tax raid.

UK borrowing costs - measured by the yield on ten-year government bonds - have reached the highest levels since the financial crisis, surpassing levels achieved under the ill-fated Liz Truss government.

The moves highlight investor anxieties towards the UK, which desperately needs stronger growth to boost the government's tax revenues. However, growth will prove elusive.

"An economic crisis in the UK is looming," says economist Andrew Sentance, a former member of the Bank of England's Monetary Policy Committee. "Lack of confidence in financial markets is a big issue for Rachel Reeves. But she shows no interest in the issue and ploughs on regardless."

Labour inherited an economy that was growing strongly, but by the third quarter, growth had shuddered to a halt at 0.1%, with subsequent monthly GDP readings pointing to 0% growth being likely in the final quarter of the year.