Andrew Bailey has acknowledged for the first time the Bank of England is dealing with a UK wage price spiral as he pledged to raise interest rates as far “as necessary” to get inflation back to the bank’s 2 per cent target.
Speaking to the British Chambers of Commerce annual conference in London, the BoE governor said the UK was experiencing “second-round” effects of inflation, highlighting the spread of rapid price rises from energy and food into generalised wage and price setting by companies.
“Some of the strength in core inflation reflects the indirect effects of higher energy prices,” Bailey said.
“But it also reflects second-round effects as the external shocks we have seen interact with the state of the domestic economy. And as headline inflation falls, these second-round effects are unlikely to go away as quickly as they appeared.”
Throughout 2022 and into this year, the BoE has repeatedly said it was trying to stop the risk of high energy and food costs affecting domestic wages and prices. It has now admitted it failed in that task.
The governor said that one of the pieces of good news in the economy was that wage growth had fallen slightly and “near-term indicators suggest that pay growth could ease further later this year”.
But the BoE’s Monetary Policy Committee was looking for further progress before it would be convinced it had restored price stability to the UK economy.
“The outlook for inflation further out is more uncertain and depends on the extent of persistence in wage and price setting,” Bailey said, adding that “the committee will continue to monitor closely the indicators of persistence in inflationary pressures”.
“I can assure you that the MPC will adjust Bank Rate as necessary to return inflation to target sustainably in the medium term, in line with its remit,” Bailey said.
The governor’s words were echoed by chancellor Jeremy Hunt, who said at the same conference there was “nothing automatic” about bringing inflation down.
After it emerged last week that the BoE thought there was close to a 50:50 chance it would miss Rishi Sunak’s target to halve inflation this year, Hunt refused to criticise the BoE in its fight against inflation.
“The Bank of England has their role through monetary policy and interest rates, we support them 150 per cent in that,” he said.
Hunt also waded into the Conservative party squabble on immigration, calling for the UK to maintain a pragmatic stance on the issue. “If you look at what’s happened since the Brexit vote, since we left the single market, the government has been pragmatic when it comes to immigration requirements,” he said.
At the same conference, which Bailey addressed having pulled out of the CBI’s equivalent before it was cancelled, BCC director-general Shevaun Haviland sought to position the body as being an advocate “for every business”.
She did not mention the CBI, the business lobby group that has suspended operations after a misconduct scandal, but said business needs a “fresh relationship with government”. “With a general election less than 18 months away we are at a pivotal moment for the voice of British business,” Haviland added.