Bank of England Governor Andrew Bailey told business leaders that the impact of the second round is spreading across the UK Photo: TOLGA AKMEN/EPA-EFE/Shutterstock
Andrew Bailey acknowledged for the first time that the UK is struggling with a price and wage spiral, a sign that the Bank of England is increasingly concerned that the country faces a protracted crisis.
The central bank governor told business leaders in London that even after the initial turmoil from the energy crisis eases and headline inflation is likely to ease, «second round effects» are unlikely to «fade away as quickly» how they appeared.
Threadneedle Street officials have said repeatedly that the Bank is raising interest rates to prevent high inflation from taking root in the broader economy through wages and prices.
Mr Bailey acknowledged that such spillovers are spreading across the UK, which means that the Bank failed to contain domestic inflation.
This comes after data released on Tuesday showed private sector wages rose 7% in the three months to March, well above the Bank's 2% inflation target .
He said: “The strength of core inflation partly reflects the indirect impact of higher energy prices. But it also reflects second-order effects, as the external shocks we have seen interact with the state of the domestic economy.”
The warning also suggests that inflation may take much longer to come down than initially expected, which means interest rates. rates should stay higher longer.
Mr Bailey said: “While we expect CPI inflation to fall quite sharply as energy costs start to decline, albeit at a slightly slower rate than forecast in February, given the short-term food price outlook, further inflation is more uncertain. and depends on the degree of persistence in setting wages and prices.”
He said that although there are signs that the labor market is starting to weaken, it is slower than the Bank predicted just a few months ago.
The labor market is still very tight, he added. The number of vacancies is also still very high, despite a slight decrease, which contributes to inflation, as employers have to compete harder for workers by raising wages.
The Bank has already raised interest rates 12 times to 4.5%. Mr Bailey said policymakers will have to raise borrowing costs even further «if there is evidence of more persistent pressure.»
He added that «short-term indicators suggest wage growth could slow further later this year.» , however.
Mr Bailey also defended the Bank's inflation record yet again, saying Threadneedle Street would have had to raise interest rates to double digits during the pandemic if it had perfect foresight. This would lead to a significant increase in unemployment and is fraught with enormous risks.
“I'm afraid monetary policy cannot reduce the impact on real incomes,” he said.
He added: «I would like to strongly refute one argument that you sometimes hear, which is that inflation is high because of too loose monetary policy in the past.»
The Bank of England has faced growing criticism for its failure to stop inflation, which remained in double digits for eight months last year.
Several economists said the Bank's quantitative easing program during the pandemic, in which it bought bonds primarily from the government, likely contributed to the rapid rise in consumer prices.
Mr Bailey acknowledged that the Bank is facing the “biggest test” of its inflation targeting regime, with prices rising at the fastest pace in about 40 years in recent months.
Inflation in The UK was at 10.1% in March. Mr Bailey said he expects it to fall by about one percentage point when April data is released next week.
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