Two top Bank of England (BoE) officials stressed on Friday the need for restraint on pay rises, a day after the British central bank sought to head off inflation running at a 30-year high by raising interest rates again.
BoE Governor Andrew Bailey said rising wage pressure threatened the bank’s ability to keep a grip on inflation, even as households faced the biggest calendar-year squeeze on their incomes since at least 1990.
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“I’m not saying nobody gets a pay rise, don’t get me wrong, but I think, what I am saying, is we do need to see restraint in pay bargaining otherwise it will get out of control,” Bailey told BBC radio in an interview broadcast on Friday.
“We are looking, I think, to see quite clear restraint in the bargaining process because otherwise, as I say, it will get out of control. It’s not at the moment, but it will do.”
Asked about Bailey’s comments, Prime Minister Boris Johnson’s spokesman said: “It’s not something that we would call for – it’s not for us to set a direction of how companies pay their employees.”
Finance Minister Rishi Sunak on Thursday said it was not his job to set wages and productivity was key for their outlook.
The hit to living standards is posing a major challenge to Johnson, who is also battling to keep his job after criticisms over social events at his official Downing Street residence during the coronavirus lockdown.
Sunak announced measures to ease the hit from a 54 percent leap in energy costs in April, when higher social security contributions are also due to kick in.
BoE Chief Economist Huw Pill, asked by Bloomberg Television if he agreed with Bailey’s call for a slowdown in pay increases, said: “You’re not going to get me to criticise my boss,” before echoing some of the concerns.
“A key assumption in our forecast … is that we don’t see from the middle of next year, persistence emerging in wage and domestic cost developments, stemming from these second-round effects,” Pill said.
“It’s that lack of that, the fact that policies including monetary policy do enough to avoid that, that is central to bringing our inflation back towards target. If we were to see developments that were not consistent with that assumption, then of course, we would have to think about further action.”
On Thursday the BoE raised borrowing costs for the second time in two months, taking its bank rate to 0.5 percent. Nearly half its policymakers wanted a bigger increase to 0.75 percent.
The BoE said consumer price inflation – which was 5.4 percent in December – was set to hit around 7.25 percent in April on the back of surging energy costs before dropping, and post-tax income for working households would fall by 2 percent this year.
Bailey said the BoE faced a “very difficult balance” to steer the economy between the pain of falling living standards and the fight to bring down inflation.
The BoE on Thursday flagged further modest tightening “in the coming months”.
Investors on Friday added to their bets on borrowing costs rising at the BoE’s next meetings with rate futures pointing to the bank rate hitting 1.0 percent by May and almost 1.5 percent as soon as August.
The bank rate stood at 0.75 percent before the pandemic swept Europe, which prompted the BoE to cut it to all-time low of 0.1 percent.