Bailey: Retailers right to warn NICs increase will lead to job cuts
Q: Your latest forecasts show a 40% chance that inflation rises to 3% – would that be a failure?
Andrew Bailey points out that the Bank’s forecasts also show inflation at target at the end of its forecast horizon.
That’s why the Bank is taking a ‘gradual approach’ to lowering rates, the governor explains.
He tells the Treasury Committee at today’s hearing:
The evidence we’ve seen recently is that the outturns have been lower than we thought they would be, but we don’t know if that’s going to continue. We’ll see.
Q: Does your model show how many jobs will be lost due to the rise in employers’ national insurance rates?
Bailey says the Bank has not made a calculation.
He says the Office for Budget Responsibility’s forecast of 50,000 job cuts is based on ‘pretty similar assumptions’ to the Bank as to how the NICs changes will be passed through the various channels. (prices, wages, profit warnings or job cuts).
And he says UK retailers are right to warn that the NICs changes will lead to jobs cuts, as they did in a letter organised by the British Retail Consortium this morning (see opening post).
Bailey says:
I saw the BRC’s letter. I think they’re right to say…
I think there is a risk here that the reduction in employment could be more. I think that’s a risk.
Key events
Global drugmakers fall behind in efforts to make medicines available in poorer countries
Julia Kollewe
The world’s biggest pharmaceutical companies have failed to increase access to life-saving medicines in poorer countries, which can result in illness or death for billions of people that could be avoided, according to a new report.
Industry performance has fallen in the past two years, according to the latest ranking of the world’s top 20 pharmaceutical companies from the Netherlands-based, non-profit Access to Medicine foundation, which is funded by the UK and Dutch governments and the Bill & Melinda Gates Foundation.
Only 43% of clinical trials take place in the 113 low and middle income countries covered by the analysis, even though they are home to 80% of the global population; as companies typically prioritise access planning in countries where they conduct trials, this leaves much of the world behind. Just 3.5% of trials – where new medicines are tested on volunteers – are conducted in the poorest countries.
Examples include Californian firm Gilead’s clinical trials in Uganda for lenacapavir, a long-acting injectable for HIV prevention, and trials by Germany’s Merck and Switzerland’s Novartis in low-income countries for new antimalarials.
Jay Iyer, the foundation’s chief executive, said:
“Companies have very clearly said we will register and prioritise registration in countries where the trials are running, but if they don’t run the trials in more areas,… then you’re never going to solve this health equity problem for all the innovative new products.”
Only three new non-exclusive voluntary drug licences have been issued, compared with six in the 2022 report, signalling a missed opportunity to improve local availability of new medicines. Voluntary licenses enable generic drugmakers to make cheaper copies of patented medicines.
The new voluntary licences include GSK’s long-acting HIV treatment cabotegravir, along with a Novartis drug for chronic myeloid leukaemia, and Gilead’s agreements with six generic manufacturers to produce and sell lenacapavir, for HIV prevention. The Access to Medicine foundation hailed these licences as “promising milestones”.
British drugmaker GSK, which has been top of the Access to Medicine index since it was first compiled in 2008, has lost the top spot to Novartis, while AstraZeneca, Britain’s biggest pharmaceutical firm, slipped from third to fifth place. France’s Sanofi and New York-based Pfizer were in third and fourth place respectively.
GSK said it is committed to investing £1bn over next 10 years on global health research & development to tackle infectious diseases, such as tuberculosis and malaria, and that it is one of the largest suppliers of of vaccines of the vaccine alliance GAVI, with 1.2bn vaccines supplied since 2010.
Emma Walmsley, the GSK chief executive, said:
“As the report makes clear, partnership with governments, multilateral organisations and others is critical to making progress here. We are committed to achieving health impact at scale as a growing, successful business, positively impacting the health of 2.5 billion people by the end of the decade, including more than 1.3 billion people in lower-income countries.”
AstraZeneca’s drop in the ranking partly reflects its focus on getting its Covid vaccine to over 180 countries at no profit pricing, which impacted on other drug programmes. The research does not include rare diseases which is a large part of the firm’s portfolio.
The research will be launched by Goldman Sachs and the investment firm AllianceBernstein at investor events in London and New York today. David Reddy, director general of the International Federation of Pharmaceutical Manufacturers & Associations, said:
“The Access to Medicine Index highlights important industry progress, such as tiered pricing models, inclusive business strategies, and voluntary licensing agreements. These efforts demonstrate the value of partnerships with governments, healthcare systems, and local organizations to improve access.”
“Despite these strides, the report underscores the need for accelerated efforts to close persistent gaps in access, particularly in low-income countries. To achieve sustainable impact, stronger collaboration among companies, governments, and global health stakeholders remains essential.”
Finally, the Treasury Committee turned to the speed at which commercial banks are passing on changes to interest rates.
Andrew Bailey says the Bank does expect passthrough to happen.
When rates were going up, he says, the passthrough was faster on fixed-term deposits than on sight deposits (where there is very little, or no, delay to accessing money).
It’s too early to assess this month’s cut in rates, Bailey says.
But if you look at the August rate cut, about half of that cut has fed through to sight deposits – so savers are still getting the other half – while more of the cut has reached fixed-term deposit rates.
Mortgages tend to be priced off the swap curvey, Bailey reminds MPs, rather than off Bank rate.
Q: So you’re not worried about passthrough rates?
Bailey doesn’t really say whether he’s worried or not, simply that the Bank “monitor it very carefully”.
That’s the end of the session.
Q: What needs to happen to fix the UK’s labour force statistics?
The Bank of England is helping the Office for National Statistics try to fix its jobs data, Andrew Bailey says.
The key is to get the participation rate of the ONS’s surveys up, but it’s not clear how long it will take to happen.
The committee then have a long discussion of the UK’s labour force inactivity – the number of people who have droopped out of the jobs market and not returned.
The Bank’s problem is that the official labour force data does not give a clear picture of what’s happening; the extent to which it’s because people can’t work due to long-term sickness, or mental health issues among young people, or because older people have taken early retirement on generous pensions, and won’t return to work.
Mann: I favour an activist approach to rates (by not cutting yet)
Hawkish policymaker Catherine Mann declares that she does not support the Bank of England’s policy of taking a ‘gradual’ approach to cutting interest rates.
Even though she was the only MPC member to vote to hold, rather than cut, rates this month, Mann insists she takes the view that “a more activist strategy is superior”.
Mann argues that monetary policy is currently less restritive than you might think, as the ‘neutral level’ of interest rates is probably much higher than is incorporated in the Bank’s models.
Mann insists that she isn’t going to vote to hold rates “forever”, pledging:
When I do cut, it will be more aggressive.
That point will be reached when Mann has seen signals in the data that a larger cut is needed, she says, as firms would react immediately to a large cut in rates.
[however, the MPC may have moved ahead of her, though its gradual approach….]
She also argues that a large cut sends a clearer signal to the economy, and “cuts through the noise” of financial market behaviour.
Q: Why does the Bank forecast that the government will raise fuel duty in future years, when ministers continually keep freezing it?
Andrew Bailey says the Bank bases its decisions on announced government policy – it can’t start forecating what policy might be.
John Glen MP returns to the impact of last month’s budget, on inflation, interest rates and growth.
Q: What assumptions have the Bank made about the ‘growing out’ impact, is it different than the OBRs?
Clare Lombardelli says the ‘big picture’ of the two assessments are broadly the same. But they do have slightly different figures, because of uncertainty over how the impact of budget measures will land.
Andrew Bailey says the Bank doesn’t forecast interest rates, but he notes that the market priced in one fewer quarter-point rate cut after the budget was delivered, which basically matched the OBR’s prediction.
Onto the sticky issue of quantitative tightening (unwinding the Bank’s QE programme by selling off bonds it bought in recent crises).
Q: How much interest will The Treasury pay out to commercial banks in this parliament on their cash deposits built up through these stimulus measures?
Bailey won’t give a figure. But he says the Bank did hand £124bn to the Treasury in the QE phase, when interest rates were very low.
The flow is now happening the other way, as the Bank is now paying more interest on commercial bank reserves.
But only £54bn has been paid out so far, meaning the Bank is still up £70bn
Bailey then explains that other central banks handle it differently. They are allowed to hang onto the interest they receive from lending money, or on assets they hold, which can be used to cover these costs.
Due to an act passed in 1844 by Sir Robert Peel, the Bank of England has to hand over that “seniorage” immediately.
That means the situation looks different in the UK, he adds.
Q: Has the Bank done any analysis of the impact of potentially using $300bn of frozen Russian assets to reconstruct Ukraine?
Governor Bailey says very little of those frozen funds are in the UK. The issue has been discussed a lot at G7 meetings, he reveals.
Q: Vietman and Germany were major beneficiaries from the US trade war with China in the first Trump administration. Could the UK have a similar opportunity if we see a EU-US trade war?
Alan Taylor says it’s well understood in trade theory that interventions in trade policy cause trade diversion.
The country imposing tariffs sees its imports fall, but ‘water finds its level’ and those goods will end up elsewhere, he suggests.
Bailey: Don’t see merit in ‘most hostile’ Brexit possible
Q: What impact would new US tariffs would it have on the UK’s relationship with Europe – last week, you warned that Brexit had undermined our economy?
Bailey says the Bank will be very transparent in its analysis, and share it with the committee.
On Brexit, he says the UK should look to trade freely with all parts of the world, and in an “active dialogue” with both the US about its plans, and Europe.
Bailey says a lot of effort has gone into maintaining open relations with Europe, as they have to trust the UK with financial services.
Bailey adds that he doesn’t take a position on Brexit, but it’s his job to deal with it, adding:
I find it hard to understand people who seem to say we should implement Brexit in the most hostile fashion possible.
Q: But the new US president may see this as a binary choice – with the UK choosing between allying with Washington or Brussels.
When does that moment crystallise?
Bailey says that moment can only come once we know what Donald Trump’s trade policies are.
Bailey on US tariffs: Fragmenting the world economy is not a good thing
Conservative MP John Glen turns to events across the Atlantic.
Q: What impact will Donald Trump’s policy on tariffs have on the UK economy? Credible sources say it could knock 0.8% off UK GDP, and hurt exports from the UK into the US?
Andrew Bailey says the Bank wasn’t able to incorporate the impact of the US election into its forecasts, as the result came in on the day it was setting UK interest rates.
It’s very important to wait and see what the administration does, rather than simply says, Bailey explains, adding:
US elections don’t quite have the same tightness of tie to the manifesto than UK elections do.
We would need to know a lot of other things, not just what new tariffs the US deploys but what how other countries respond, and what the impact on exchange rates is.
Bailey says:
Fragmenting the world economy is not a good thing, quite clearly.
But the precise effect of particular tariffs, especially if there are different levels set for different countries, is hard to predict – also as the UK has a more services-dominated economy.
GMB: Retailers’ job cuts warning is ‘utterly pathetic’
Incidentally, unions do not share the Bank of England governor’s support for UK retailers unhappy about paying a higher minimum wage and more national insurance contributions.
The GMB Union has described big retailers warning they will have to slash jobs if forced to pay a bit more tax as ‘utterly pathetic.’
Nadine Houghton, GMB National Officer, says:
“Multi billion pound businesses pleading poverty because they’re being made to pay more to support public services is utterly pathetic.
“Most of these companies’ fortunes are already subsidised by the tax payer – they pay very low wages which then have to be topped up by in work benefits.
“And some – for example Asda – have been systematically trousering fortunes made by underpaying women workers.
“It’s only right that they should now contribute a bit more to rebuilding our country.”
On the other hand, if firms passed on the impact of the budget entirely in higher prices, it would push inflation up by more.
The Bank’s latest forecasts, released two weeks ago, suggested the budget would raise inflation by half a percentage point at its peak (but that was based on the impact being split across prices, profit margins, workforce levels and wages).
MPC member Catherine Mann says it all depends on the underlying demand conditions (ie, if demand is high, you can get away with price rises, but if sales are strugging, then not).
Bailey: Retailers right to warn NICs increase will lead to job cuts
Q: Your latest forecasts show a 40% chance that inflation rises to 3% – would that be a failure?
Andrew Bailey points out that the Bank’s forecasts also show inflation at target at the end of its forecast horizon.
That’s why the Bank is taking a ‘gradual approach’ to lowering rates, the governor explains.
He tells the Treasury Committee at today’s hearing:
The evidence we’ve seen recently is that the outturns have been lower than we thought they would be, but we don’t know if that’s going to continue. We’ll see.
Q: Does your model show how many jobs will be lost due to the rise in employers’ national insurance rates?
Bailey says the Bank has not made a calculation.
He says the Office for Budget Responsibility’s forecast of 50,000 job cuts is based on ‘pretty similar assumptions’ to the Bank as to how the NICs changes will be passed through the various channels. (prices, wages, profit warnings or job cuts).
And he says UK retailers are right to warn that the NICs changes will lead to jobs cuts, as they did in a letter organised by the British Retail Consortium this morning (see opening post).
Bailey says:
I saw the BRC’s letter. I think they’re right to say…
I think there is a risk here that the reduction in employment could be more. I think that’s a risk.