By Paul Hannon

There is growing evidence that U.K. businesses are responding to higher employment taxes by trimming jobs and pay, rather than raising their prices, Bank of England Governor Andrew Bailey said Thursday.

The government increased its tax on employment at the start of April, and BOE policymakers worried that would prompt businesses to hike their prices to cover their increased costs. That could have added to a rebound in inflation that the BOE fears could become long lasting.

But in a speech to business leaders, Bailey said that while it is too early to be sure, the new tax doesn't appear to be pushing prices up.

"I am beginning to hear a bit more evidence of adjustments through pay and employment," Bailey said.

The U.K.'s central bank has been more cautious than European peers in lowering its key interest rate as inflation has fallen from its 2022 peak.

That is because inflation has remained higher than elsewhere in Europe, while wages have risen more rapidly.

Bailey welcomed signs that the jobs market is loosening and wage rises are cooling, but said the key interest rate will need to remain restrictive in order to make sure that continues.

"A sustainable disinflation in the U.K. economy after the big shocks we have faced relies on a normalization of wage growth to levels consistent with the 2% inflation target," he said. "This process still has some way to go."

The U.K.'s annual rate of inflation jumped back above 3% in April as prices for some utilities rose sharply. Many BOE policymakers worried that might change household expectations of future inflation, and strengthen demands for higher wages.

Bailey said that while policymakers need to remain vigilant, that is not the most likely outcome.

"We do not expect that they will rekindle domestic inflationary pressures via new second-round effects," he said.

The BOE last week left its key rate unchanged, having cut in May. Bailey said policymakers will "assess the situation afresh" when they next gather in August.

"Interest rates remain on a gradual downward path," he said.

Write to Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

June 26, 2025 07:37 ET (11:37 GMT)

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