UK firms to raise prices and cut jobs after tax hike, BoE survey shows

LONDON (Reuters) - British businesses expect to raise prices and reduce staff numbers in response to an increase in employers' social security contributions that will take effect in April, a Bank of England survey of more than 2,000 firms showed on Thursday.

The BoE's Decision Maker Panel showed 61% of companies expected reduced profits, 54% planned to raise prices, 53% expected lower employment and 39% intended smaller pay rises due to the rise in National Insurance set out in Oct. 30's budget.

Others surveys have also shown a slide in business sentiment and hiring and investment intentions since finance minister Rachel Reeves announced a 25 billion-pound ($31 billion) increase in payroll taxes.

The slowdown in the economy has contributed to worries in financial markets about Britain's public debt levels which has pushed up borrowing costs sharply this week.

Separate figures on Thursday from an association of recruitment agencies showed demand for new staff had fallen by the most since August 2020.

The BoE - which is considering when to cut interest rates again - is watching for whether the higher employment costs feed into inflation through price rises, or job cuts, reduced investment and wage growth which would slow the economy.

Rob Wood, chief UK economist at Pantheon Macroeconomics, said the BoE's survey suggested the tax rises were feeding more into prices - and less into a slowdown - than the REC or S&P purchasing managers' index surveys were reporting.

"The core DMP (survey) questions continue to signal stubborn inflation and wage growth, and a less severe weakening in the jobs market than qualitative surveys show, which should keep the Monetary Policy Committee cutting interest rates only 'gradually'," he said.

British consumer price inflation rose to an eight-month high of 2.6% in November and the BoE expects it to rise further in 2025 and not return to its 2% target until 2027 - limiting its willingness to cut interest rates from their current 4.75%.

The BoE survey, conducted between Dec. 6 and Dec. 20, showed firms planned to raise prices by 3.8% over the next 12 months, 0.1 percentage points more than expected in the three months to November.

Expected year-ahead wage growth remained unchanged at 4.0% on a three-month moving-average basis in December.

($1 = 0.8141 pounds)

(Reporting by David Milliken; Editing by William Schomberg, Suban Abdulla and Toby Chopra)