Bank of England calls for wage moderation to tame inflation

  • Bailey fears out-of-control inflation with no wage constraint
  • The pill indicates that further action is needed if wage pressure persists
  • The BoE raised rates for the second consecutive meeting on Thursday
  • Central bank predicts more likely hikes in coming months
  • Markets see Bank Rate rise to 1.0% in May from 0.5% currently

LONDON, Feb 4 (Reuters) – Two senior Bank of England officials stressed on Friday the need to moderate wage increases, a day after Britain’s central bank tried to contain inflation at its highest level in 30 years by raising interest rates again.

Governor Andrew Bailey said growing pressure on wages threatened the BoE’s ability to rein in inflation, even as households faced the biggest squeeze on their incomes since at least 1990.

“I’m not saying nobody gets a pay rise, don’t get me wrong, but I think what I’m saying is that we need to exercise restraint in salary negotiations or else it will spiral out of control” , Bailey told the BBC. radio in an interview broadcast on Friday.

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“We’re looking, I think, to see some pretty clear restraint in the negotiation process because otherwise, as I said, it will get out of control. It’s not for now, but it will be fine.”

Asked about Bailey’s comments, Prime Minister Boris Johnson’s spokesman said: “It’s not something we would call – it’s not up to us to set direction on how companies pay their employees.” Read more

Finance Minister Rishi Sunak said on Thursday that it was not up to him to set wages and that productivity was key to their prospects.

The impact on living standards poses a major challenge for Johnson, who is also battling to keep his job after criticism over social events in Downing Street during the lockdown. Read more

Sunak announced measures to soften the blow of a 54% jump in energy costs in April, when higher social security contributions are also expected to come into effect.

BoE chief economist Huw Pill, asked by Bloomberg Television if he agreed with Bailey’s call for a slowdown in pay rises, said: ‘You’re not going to make me criticize my boss “, before echoing some of the concerns.

“A key assumption in our forecast … is that from the middle of next year we see no persistence emerging in the evolution of wages and domestic costs, resulting from these second-round effects. “, said Pill.

“It’s this lack of that, the fact that policies, including monetary policy, are doing enough to prevent this, that is critical to getting our inflation back on target. If we were to see developments that weren’t compatible with this hypothesis, then of course, we would have to think about other actions.”

On Thursday, the BoE raised its borrowing costs for the second time in two months, taking its discount rate to 0.5%. Nearly half of its policymakers wanted a bigger increase to 0.75%.

The BoE said consumer price inflation – which was 5.4% in December – is expected to rise to around 7.25% in April due to soaring energy costs before falling, and that the after-tax income of working households would fall by 2% this year.

Bailey said the BoE faced a “very difficult balance” in steering the economy between the pain of falling living standards and the struggle to bring inflation down.

The BoE signaled further modest tightening “in the coming months” on Thursday.

Investors on Friday added to their bets on rising borrowing costs at upcoming BoE meetings with rate futures indicating the Bank Rate would hit 1.0% in May and nearly 1 .5% from August.

The discount rate stood at 0.75% before the pandemic swept across Europe, prompting the BoE to cut it to an all-time low of 0.1%.

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Reporting by William Schomberg and Alistair Smout; Editing by Kate Holton, Alex Richardson and Mark Potter

Our standards: The Thomson Reuters Trust Principles.

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