UK businesses brace for tax hikes as inflation and hiring concerns rise

The UK is preparing for a slight increase in headline inflation, projected to rise by 0.1% to reach 2.3% by the end of next year. This increase is attributed to the freeze on fuel duty.

Bank of England GDP Forecast

The Bank of England has adjusted its GDP forecast for 2025, raising it from 1.5% to 1.6%. This change in economic outlook has led analysts to suggest that the Bank of England may slow its pace of monetary easing, which could result in higher borrowing costs for businesses.

Probability of Rate Cut

There is an 80% probability of a 25 basis point rate cut in the central bank's upcoming meeting. Morgan Stanley predicts that the Bank of England might adopt a more cautious approach to rate cuts. Goldman Sachs expects the Bank to proceed with the rate cut next week, although recent budgetary measures proposed by Chancellor Rachel Reeves could lessen the urgency for further cuts in the near term.

Goldman Sachs Forecast

Looking ahead to 2025, Goldman Sachs maintains its forecast for sequential rate cuts starting in February, with a predicted Bank Rate decline to 3% by November 2025.

Concerns for British Businesses

The recent budget announcement by Finance Minister Rachel Reeves has raised concerns among British businesses. The proposed tax increases, including an increase in the National Insurance payroll tax for employers, are expected to hinder hiring and exacerbate inflationary pressures. Critics argue that the tax hike will burden employees by limiting companies' capacity to increase wages and hiring. The budget also includes increases to the minimum hourly wage, which will further elevate costs for employers.

Office for Budget Responsibility

The Office for Budget Responsibility has indicated that the tax-raising and public spending measures could stimulate economic growth in the near term but also carry the risk of increasing inflation.

Goldman Sachs Inflation Forecast

Goldman Sachs has adjusted its forecast for UK core inflation, now estimating it to reach 2.5% by December 2025.

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