Businesses have embarked on the longest stretch of job cuts since the pandemic, according to Bank of England data, reinforcing concerns that the labour market is under strain from payroll tax increases and steep rises in the minimum wage.

On a three-month average basis, businesses have reported to the Bank of England that they laid off staff in each period stretching back to July last year, the longest run of redundancies since the late stages of the pandemic in 2021.

The lay-offs broadly coincided with the introduction of the £25 billion increase in employer national insurance contributions, that took effect last April alongside a 6.7 per cent increase in the minimum wage, which is also due to rise again this spring.

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The data will reinforce concerns that the labour market has been weakened by government policy over the past year, with the official rate of unemployment up to 5.2 per cent in the latest three months for which data is available, compared with 4.4 per cent in the previous year.

Young people have borne the brunt of the downturn, with the jobless rate among those aged 16 to 24 up to an 11-year high of 16.1 per cent. The government has launched a job subsidy scheme for young people in an effort to tackle the problem.

Economists believe that the health of the labour market will have a strong influence on the wider economy this year, predicting that the Bank of England will cut interest rates only if wage growth cools and unemployment continues to rise.

However, the US-Israel war with Iran has complicated the outlook for UK interest rates. Rising oil and gas prices threaten to propel inflation and quell growth by eroding real incomes and raising the cost of production, meaning that the Bank may be forced into keeping monetary policy tight to quash price growth. 

Before the attacks on Iran last weekend, investors had thought a quarter-point rate cut to 3.5 per cent was a dead certainty on March 19, when the Bank next meets, but they now see just a 30 per cent chance of this happening.

On a single-month basis in February, businesses told the Bank of England that there was a 0.7 per cent average reduction in the size of their workforce over the past year, larger than the 0.3 per cent drop in the previous month.

Over the coming year, the average business expected to increase its headcount by 0.3 per cent in February, up from 0.2 per cent in January.

On average, businesses said that they planned to raise prices by 3.3 per cent in the coming year, down from 3.4 per cent. Rob Wood, chief UK economist at Pantheon Macroeconomics, pointed out that this was the first time “expected price hikes have been below 3.5 per cent for two consecutive months … since August 2021”.

Last month, Bank of England economists predicted that inflation would drop to 2 per cent in April because of a decline in energy bills. However, the surge in gas prices from the Middle East conflict could push up inflation later this year.