Andrew Bailey acknowledged for the first time that the Bank of England is grappling with a spiraling wage price spiral in the UK, as he pledged to raise interest rates “if necessary” to bring inflation back to the Bank’s 2% target.
The Bank of England governor told the annual meeting of the British Chamber of Commerce in London that Britain was experiencing a “second-round” impact from inflation, highlighting that rapid increases in energy and food prices had spilled over into businesses’ prevailing wages and price setting.
“Some of the strength in core inflation reflects the indirect impact of higher energy prices,” Bailey said.
“But it also reflects second-round effects, as the external shocks we see interact with domestic economic conditions. As headline inflation falls, these second-round effects are unlikely to disappear as quickly as they arise.”
From 2022 to this year, the BoE has repeatedly said it is working to stem the risk of high energy and food costs affecting domestic wages and prices. It now admits it failed in that task.
The governor said one piece of good news in the economy was a slight decline in wage growth, with “recent indicators pointing to a further slowdown in wage growth later in the year”.
But the Bank of England’s Monetary Policy Committee is looking for further progress before it can be confident it has restored price stability to the UK economy.
“The outlook for inflation is more uncertain, depending on the extent to which wage and price setting persist,” Bailey said, adding that “the Committee will continue to closely monitor indicators of persistent inflationary pressures”.
“I can assure you that the Monetary Policy Committee will adjust the bank rate if necessary to bring inflation back to the sustainable target over the medium term, consistent with its remit,” Bailey said.
The Premier’s words were echoed by Chancellor Jeremy Hunt, who told the same meeting that there was “no certainty” about lowering inflation.
Hunt declined to criticize the BoE’s efforts to fight inflation after news last week that the BoE sees a near 50-50 chance of missing Rishi Sunak’s target of halving inflation this year.
“The Bank of England works through monetary policy and interest rates and we back them 150% on that,” he said.
Hunt also weighed in on the Conservative debate 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 in terms of immigration requirements,” he said.
At the same meeting, Bailey spoke of quitting the CBI’s equivalent before its abolition, with BCC director-general Shevaun Haviland seeking to position the agency as an advocate “for all businesses”.
She made no mention of the CBI, the business lobby group that has suspended operations following the misconduct scandal, but said businesses needed “a new relationship with the government”. “With less than 18 months to go until the general election, we are at a critical moment for UK business to have a voice,” added Haviland.