The governor of the Bank of England has urged workers to limit their demands for a pay rise this year warning of the impact of high inflation on those who don’t have ‘bargaining power’.
Andrew Bailey said the problem was one “we all have to be very conscious of” hours after he warned households will suffer the deepest fall in living standards on record as the UK plunges into a yearlong recession this autumn.
He also rejected criticism from allies of Liz Truss, the frontrunner to become prime minister, that the bank should have raised interest rates earlier, warning that could have tanked the economy.
Calling for wage restraint, Mr Bailey said: “If everybody tries to beat inflation, it doesn’t come down, it gets worse, that’s the problem.”
He added: “There’s a second problem. I put this in terms of high pay rises and high price increases, because in that world it’s the people who are least well off who are worst affected, because they don’t have the bargaining power. I think that is something that broadly we all have to be very conscious of.”
The current inflation rises were particularly problematic because they are concentrated in rising prices of “essentials” such as energy and food. He warned that the bank had to act to ensure inflation did not become “embedded”.
“My key point is: If inflation becomes embedded and persistent it gets worse and the effects get worse and that’s why we have to raise rates,” he told BBC Radio 4’s Today programme.
Union leaders reacted angrily to the call. TUC Head of Economics Kate Bell said: “It’s time for companies to rein in their profits – not for hard pressed workers to cut back even further.
“Without wage increases, working people will simply stop spending on anything non-essential – and that will hurt our high streets, damage business and make a recession very likely, putting jobs at risk up and down the country.
“Making sure people can put food on the table for their family is not going to push up inflation.”
On Mr Bailey’s mention of those without bargaining powe, she added: “’If the governor is worried that some workers might miss out on negotiated pay rises, he should encourage all workers to join a union.”
Earlier Truss supporter and business secretary Kwasi Kwarteng told Sky News the mandate of the BoE would be reviewed if she wins the election.
“If your target is 2 per cent and you are forecasting 13 per cent something has gone wrong,” he said.
Another ally Suella Braverman also accused the bank of not increasing interest rates quickly enough. But Mr Bailey hit back that the bank had been raising rates since December and that to have done so early could have jeopardised the economy.
“We don’t make policy with the benefit of hindsight,” Mr Bailey said. “I would challenge anybody to have been sitting here a year ago to say: ‘There’s going to be a war in Ukraine and it’s going to have this effect on inflation’.”
“If you go back two years, given the situation we were facing at that point in the context of Covid, in the context of the labour market, the idea that at that point we would have tightened monetary policy… I don’t remember there were many people saying that at that time.”
He also pointed to warnings of a sharp rise in unemployment as the Covid furlough scheme came to an end.
Asked if raising interest rates at that stage would have harmed the economy, he said: “Yes.”
