The Governor of the Bank of England yesterday doubled down on his pleas to workers to temper pay demands despite households facing the worst cost of living squeeze in a generation.
Andrew Bailey added to his previous comments when responding to a grilling by MPs, also calling on businesses to exercise restraint during price setting considerations.
“I understand the consequences and the unpopularity of what I have said, but I think these points – and it does apply to price setting as well let me be clear – do need to be said,” Bailey said.
Bailey ignited a furore earlier this month when he asked workers to hold back on asking employers for a pay bump.
His calls come as a forecasted 7.25 per cent inflation peak in April, a 54 per cent uplift to the energy price cap and a 1.25 percentage point national insurance hike are expected to combine to erode Brits’ living at the worst rate since the late 1940s, according to calculations by the Resolution Foundation.
Former rate setter and now senior advisor to Cambridge Econometrics Andrew Sentance told City A.M. the Bank is using concern about pay pressures to distract from its own shortfalls in tackling inflation.
“The Bank of England should take responsibility for its own actions,” Sentance said.
“Blaming people for claiming wage increases is not the right position… they need to account for their own reactions,” he added.
“They shouldn’t be using that as an excuse for what they should have done in the second half of last year.”
Businesses also need to consider the severe economic shock delivered by the pandemic that has pushed inflation to historic highs when settling on the rate of price increases, Bailey said.
The Bank is concerned that a sudden sharp rise in energy, raw material and transport costs – which tend to be short-lived and peter out – could prompt firms to hike prices rapidly, in turn encouraging workers to demand higher pay, sparking further price increases from businesses to protect their margins.
This process may lead to so-called “second round effects” that can embed high inflation in the UK economy over the long term.
“If everybody tries to get ahead of the shock… we’ll get the second round effects and it will get worse,” Bailey added.
“It’s not just wage setting, it’s also price setting… it’s both.”
Threadneedle Street has been accused of contributing to stoking inflation by leaving interest rates at rock-bottom lows for too long.
Bailey and other members of the rate setting committee stressed that further rate hikes are on the way in the coming months.
The Bank has already hiked rates at back-to-back meetings for the first time since 2004.
Economists at Goldman Sachs are pencilling in rate hikes at each meeting through to August and that borrowing costs will hit 1.75 per cent by November, the highest level since January 2008.