Bank of England Governor Andrew Bailey has warned that wage growth cannot continue at its current pace. Photo: REUTERS/Henry Nicholls
Andrew Bailey blamed “unsustainable” wage growth for fueling inflation as the Bank of England raised interest rates to 5% in an attempt to tame runaway price increases.
Speaking after Threadneedle Street announced a larger-than-expected 0.5 percentage point increase in rates, the governor warned that wages “cannot continue” to rise at current rates if inflation eases.
The remarks were criticized by former Deputy Governor Sir Charlie Bean, who said workers were unlikely to heed them in an attempt to protect their standard of living and suggested that the Bank did not have a clear plan.
Mr Bailey said he still expects inflation “to come down noticeably this year” but added: “If that's the case, it's important that pricing and wages reflect that, because current levels, I'll be completely honest, are unsustainable.” . /p>
“We can't keep raising wages at the current level.”
Asked if the Bank fears that it will cause a recession due to a sharp increase in borrowing costs, he said: “We do not expect, we do not want a recession. But we will do everything necessary to bring inflation down to the target level.”
Thursday's rate hike – double what economists expected – will affect more than 1.4 million homeowners, including 639,000 tracker rate mortgage borrowers, whose payments will increase by an average of £285 a year.
An additional 773,000 people with standard variable rates will face an increase of £182 a year.
Several major lenders, including Santander and Nationwide, responded immediately to the rate hike by passing on the full increase to their floating mortgage holders.< /p>
The think tank at the National Institute for Economic and Social Research said the increase in bills would wipe out the savings of 1.2 million households. Markets are betting that rates will average 5.5% over the next three years.
Mr Bailey said: “I understand the hardship and pain that is causing so many people.
“If we don't raise rates now, it could get worse later.”
The governor has previously been criticized for telling workers not to demand higher wages for fear that it would drive up prices. His latest comments are a step forward and suggest that the Bank believes this is actually happening now. Inflation in May was 8.7 percent, well above the 2 percent target.
The governor's remarks on wages, however, drew immediate criticism.
Sir Charlie, who was -on Bailey early in his Threadneedle Street career, said the governor's call for a wage cap would likely “go unheeded” as workers rationally demanded higher wages to “compensate for their declining standard of living.” /p>
The move suggested that “the central bank doesn't really know what it needs to do,” he added.
Rishi Sunaka's spokesman also refused three times to say that Mr. Bailey is doing a good job, saying instead, “He still has the Prime Minister's support.”
Both the prime minister and Jeremy Hunt, chancellor, have supported Mr. Bailey publicly and privately, and sources have dismissed any suggestion that he could be removed from the governorship.
Mr. Bailey also lashed out at companies “seeking to restore profit margins” by maintaining high prices. Mr. Sunak vowed to put pressure on supermarket executives to lower the cost of the weekly store. However, he downplayed the prospect of tax cuts or new spending to help mortgage holders, and acknowledged that it would now be “harder” to keep his promise to bring inflation down to about 5% this year.
Meanwhile, Mr. Hunt set the stage for a new clash with unions by warning that capping public sector wages will be a key part of the effort to “control public sector borrowing.”
Mr. Hunt's comments in a letter to the Governor acknowledging the interest rate hike suggest that Whitehall departments will face further spending cuts as budgets are set in monetary terms and many wage increases were already planned during the spending review. 2021 .
Paying wages is usually announced during the parliamentary summer recess in July, although deals were delayed last year due to ongoing tensions between unions and officials that sparked strikes.
Ben Zaranko, an economist at the Institute for Financial Studies think tank, said public sector wage increases of more than 5% this year would prove “difficult.”
He said giving in to higher wage demands fees without increasing overall spending lead to cutbacks elsewhere, adding: “In schools, this could result in not buying as many textbooks.”
Mr Hunt is scheduled to meet with bank executives on Friday, to remind them of their responsibility to protect vulnerable borrowers. He will also hold talks with regulators in the coming days on how to ensure companies don't profit during the crisis.
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