In a Treasury Committee hearing with officials from the Bank of England focused on the work of the monetary policy committee (MPC), Andrew Bailey, governor, professor Alan Taylor, an external member of the MPC, and Huw Pill (pictured), chief economist, discussed the bank’s decision to hold interest rates at 3.75% last month and were grilled on the impact of rising youth unemployment, now nearing the critical one million mark.

Dame Meg Hillier, chair of the committee, opened the session with a question about what factors would influence a further cut in interest rates.

Bailey said: ‘The good news is that we are expecting inflation to come back round the target sooner than we were expecting… it’s now very reasonable to think that inflation will be around the target in the April.’

The committee moved on to the ‘fiscal choices’ taken during the chancellor Rachel Reeves’ first Budget in 2024, especially the impact of national insurance contribution (NIC) rises and the impact on youth unemployment.

Dame Harriett Baldwin MP asked: ‘Obviously one of the standout concerns has been unemployment for young people… how much worse is unemployment going to become for young people?’

The Office for National Statistics latest unemployment figures showed that 957,000 young people, equivalent to 12.8% of 16-24 year olds, were not in education, employment, or training (Neet).

Pill said: ‘I very much share your concern about unemployment, particularly for the younger people. I have a daughter looking for a job, this is very immediate experience personally for me as well.

‘I would say that some of the changes around tax, national living wage, they have particularly had an effect at the 16-21 age, and that’s because some of the changes have been to move some of the special lower rates of the national living wage up to the normal rates.

‘Similarly, the changes in the national insurance contributions had the same impact.

‘Both of those things have had a particular effect on young people… they have been particularly acute for that part of the labour market.’

Also pointing to ‘deeper structural changes’ affecting employment, Pill said: ‘The fact that many entry-level jobs are being affected by AI is something that perhaps is difficult to manage.

‘The surveys that we see thus far talk about a lot of companies taking up AI as a way of trying to improve productivity.

‘As yet they don’t report that’s resulted in a large reduction in their willingness or ability to employ labour. But of course, on a forward basis I think that remains an open question.’

The chief economist also blamed the impact of the pandemic on young people, saying: ‘There are these issues about the echo, or long-lasting effects, coming out of covid.

‘Your first job is an important part of being able to enter the labour market and be productive… that can have very long-lasting effects, and they do cross with things like health issues and mental health issues.’

Touching on unemployment, rather bluntly Bailey said: ‘Let’s be honest, it’s high’.

Bailey said: ‘You ask what we observe when going round the country, the youth unemployment rate is around 16% which is high.

‘It’s also interesting that the regional pattern of unemployment is quite unusual… I think I'm right in saying London has the highest rate of unemployment amongst the regions, that’s quite unusual in British history’.

Chair Dame Meg Hillier then went straight to the tax question, asking: ‘We’ve skirted a bit round the relationship between national insurance contributions and the impact of unemployment… what impact has that had on unemployment?’

Professor Taylor told MPs: ‘I think that has been a recurring theme in conversations I’ve had with businesses around the country in the last 12 months. But it’s not the only theme.

‘I think what came through very early on after the Budget, they [the government] were taking measures to adjust. It’s important to emphasise in the context of the discussion there were many other things that were on their minds, global uncertainty for example and the restrictiveness of our monetary policy.’