Bank of England Warns of Sluggish Growth and Inflation

Strategic Insights -

The Bank of England has warned of sluggish economic growth and rising food prices, attributing the slowdown to the £25 billion national insurance raid implemented by Chancellor Rachel Reeves. The report highlights that the increased national insurance contributions (Nics) and uncertainty caused by the tax rise have "weighed on growth", according to businesses. The Bank's latest monetary policy report also notes that higher labour costs, partly due to increases in minimum wages and the impact of the Nics, have contributed to food price inflation.

Key Takeaways:

  • The Bank of England's latest monetary policy report warns of sluggish economic growth, citing the £25 billion national insurance raid as a contributing factor.
  • The increased national insurance contributions (Nics) have weighed on growth, according to businesses, and have contributed to food price inflation.
  • Higher labour costs, partly due to increases in minimum wages and the impact of the Nics, have also contributed to food price inflation.
  • Food prices in shops are forecast to be 5% higher in the autumn than they were a year ago.
  • Chancellor Rachel Reeves' decision to increase employers' national insurance contributions has come into effect in April this year.
  • The report notes that most of the wage costs, but only part of the Nics increase so far, have been passed on to consumers, putting up prices by about 1% to 2%.
  • Consumers are expected to face further increases in food prices in the second half of 2025, with Helen Dickinson, chief executive at the British Retail Consortium, warning that the current trend may only be the beginning.
  • The Office for Budget Responsibility's forecast for growth in 2026 and 2027 remains significantly above the Bank of England's forecast, suggesting markdowns are coming, increasing the extent to which Chancellor Reeves will need to tighten policy to keep to her fiscal rules.

Statistics:

  • 1.25%: The Bank's revised economic growth forecast for this year, up from its previous estimate of 1%.
  • 4%: The interest rate cut by the Bank of England to its lowest level since March 2023.
  • £7 billion: The estimated increase in retailer costs this year, from higher employment costs to the introduction of a new packaging tax.
  • 6.7%: The increase in the national living wage in April.
  • 1% to 2%: The estimated increase in food prices so far, with consumers facing further increases in the second half of 2025.
  • 5%: The forecast increase in food prices in shops in the autumn compared to a year ago.

Sources:

  • Bank of England's latest monetary policy report
  • The Labour Party (@UKLabour)
  • James Smith, research director at the Resolution Foundation economic think tank
  • Helen Dickinson, chief executive at the British Retail Consortium
  • Office for Budget Responsibility (OBR)
  • Bank of England