Andrew Bailey has acknowledged for the first time that the Bank of England is dealing with a downward spiral in UK wage rates, vowing to raise interest rates “as necessary” to bring inflation back to the bank’s 2 per cent target.
Speaking to the annual conference of the British Chambers of Commerce in London, the BoE governor said the UK was suffering from the effects of a “second round” of inflation, highlighting the pervasiveness of rapid price increases from energy and food to generalized wages and price-fixing by firms.
“Some of the strength in core inflation reflects the spillover effects of higher energy prices,” Bailey said.
But it also reflects second-round effects where the external shocks that we’ve seen interact with the state of the domestic economy. And with headline inflation lower, these second-round effects are unlikely to disappear as quickly as they appeared.”
Meanwhile, Prime Minister Rishi Sunak painted a bright economic picture, telling reporters on his way to the G7 summit in Japan that the economy was improving faster than expected.
He said income statistics “significantly outperformed” recent forecasts and that consumer confidence was on the rise. But he said his priority was to tackle inflation and that tax cuts would have to wait.
The BoE has said repeatedly over the past 18 months that it was trying to stem the risks of rising energy and food costs affecting domestic wages and prices. She has now admitted that she failed in that task.
One good news in the economy, the governor said, is that wage growth has eased slightly and “near-term indications are that wage growth may ease further later this year.”
But the Monetary Policy Committee of the Bank of England was looking for more progress before it was convinced that it had restored price stability to the UK economy.
Bailey said, “The prospects for inflation are more uncertain and depend on the extent to which wages and prices continue to be fixed,” adding that “the committee will continue to closely monitor indicators of continued inflationary pressures.”
“I can assure you that the MPC will adjust the bank rate as necessary to return inflation to a sustainable target over the medium term, in line with its mandate,” Bailey said.
The words of the governor on inflation were echoed by Chancellor Jeremy Hunt, who said at the same conference that there was “nothing automatic” about controlling price increases.
“The BoE has its role to play with monetary policy and interest rates, and we support them 150 per cent in that,” he said.
Hunt has also waded into the Conservative Party’s dispute over immigration, calling for the UK to maintain a pragmatic stance. “If you look at what has happened since the Brexit vote, since we left the single market, the government has been very pragmatic when it comes to immigration requirements,” he said.
At the same conference, which Bailey spoke about after he withdrew from the CBI equivalent prior to its cancellation, BCC General Manager Shevaun Haviland sought to position the body as an advocate for “every business”.
It did not name the CBI, the business lobby group that suspended operations after a misconduct scandal, but said the business needed a “new relationship with the government”.