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Will the BOE intervene or carry out an emergency hike? (2/3)

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  • So we have a 1ppt reduction in the basic rate of income tax from April. It's hard to see this increasing spending in the short-term. Despite the energy price caps, energy bills are still going to be roughly double what they were last winter. And by the time people start to receive the benefits of the tax cuts, inflation is likely to have peaked. So this is probably not going to be impacting near-term inflation expectations. In any case, it is just bringing a planned cut forward one year, and had been rumoured in the media.
  • The surprise was the abolition of the 45% additional income tax rate - also from April. This could be inflationary, but may also have the impact of delaying a bit of demand in the near-term if bonuses etc. are delayed until April when the rate is lower (so cash flows get delayed and the full benefits aren't seen until (again) after inflation has peaked.
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  • So we have a 1ppt reduction in the basic rate of income tax from April. It's hard to see this increasing spending in the short-term. Despite the energy price caps, energy bills are still going to be roughly double what they were last winter. And by the time people start to receive the benefits of the tax cuts, inflation is likely to have peaked. So this is probably not going to be impacting near-term inflation expectations. In any case, it is just bringing a planned cut forward one year, and had been rumoured in the media.
  • The surprise was the abolition of the 45% additional income tax rate - also from April. This could be inflationary, but may also have the impact of delaying a bit of demand in the near-term if bonuses etc. are delayed until April when the rate is lower (so cash flows get delayed and the full benefits aren't seen until (again) after inflation has peaked.