by David Milliken and Andy Bruce

LONDON (Reuters) – The potential impact of the British budget on inflation poses the main threat to the outlook for a rate cut, senior Bank of England (BoE) officials said on Tuesday.

British Finance Minister Rachel Reeves presented on October 30 the largest tax increase in three decades in Great Britain as part of the first budget of the Labor government, which came to power last July after fourteen years of Conservative governments. .

BoE Governor Andrew Bailey believes that higher taxes for businesses are likely to cause an increase in the cost of employment. He reiterated the central bank’s view that it was not yet possible to know how this increase would be reflected in consumer prices. According to him, companies could cut jobs, increase their prices or slash their margins.

This month, at the end of its monetary policy meeting, the BoE lowered its main key rate, from 5% to 4.75%, while ensuring that it wanted to gradually make further rate reductions. The bank, however, during its meeting revised its inflation forecasts upwards, largely due to the new budgetary measures.

“A gradual approach to removing monetary policy restrictions will help us see how this plays out, as well as other risks to the inflation outlook,” Andrew Bailey said in a paper ahead of his hearing before the Committee on Monetary Policy. Treasury of Parliament.

Clare Lombardelli, deputy governor for monetary policy and considered a centrist on the committee, told lawmakers she was more concerned about the risks of rising price pressures than the downside risks, due to the cost that would result from the entrenchment of inflation.

GRADUAL APPROACH

Economists polled by Reuters expect inflation to rise above the BoE’s 2% target with the release of October figures on Wednesday. The BoE for its part estimates that inflation will continue to increase in the months to come.

Catherine Mann, the only member of the BoE’s Monetary Policy Committee (MPC) to vote for the status quo on rates this month, said tax increases for employers could offer businesses the opportunity to pass on price increases, which would compromise the BoE’s ambition to bring inflation down to 2% in the years to come.

Alan Taylor, another MPC member, said a gradual approach to reducing borrowing costs was in line with the recent market outlook, which forecasts around four rate cuts of a quarter point each by the end of the year. 2025.

“But that doesn’t mean that’s what’s going to happen, if the conditions are weaker, and from my point of view (if the balance is) affected by the downside risk today compared to the downside risk increase from about a year ago, so we could move faster,” Alan Taylor said.

Markets were expecting four rate cuts by the BoE by the end of 2025 before the government presents its budget. These forecasts have been reduced to two or three reductions since the presentation of the budget and the election of Donald Trump as President of the United States.

(Writing by Andy Bruce; Claude Chendjou, edited by Kate Entringer)

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