2023-07-10 16:56:53
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Andrew Bailey, Bank of England governor, will warn on Monday that the “unexpected resilience” of Britain’s economy has exacerbated wage and demand pressure that is fuelling stubbornly high inflation.
He is due to tell the annual Mansion House dinner in the City of London that current pay deals are unsustainable if the central bank is to meet its target of cutting inflation to its 2 per cent target, adding: “It is crucial we see the job through.”
Bailey will tell City figures at the dinner that the UK economy has shown unexpected resilience in the face of inflationary shocks unleashed by the Covid pandemic and Russia’s invasion of Ukraine, noting that the unemployment rate stands at 3.8 per cent.
He will go on to say that nobody wants to “to see unemployment higher or growth weaker” but that inflation is proving “more sticky than previously expected”, according to a copy of his speech released by the central bank.
“The interaction of above-target headline inflation with labour market tightness and demand pressure in the economy has made underlying developments in goods and services price inflation more sticky than previously expected,” Bailey will say.
“Both price and wage increases at current levels are not consistent with the inflation target.”
Annual private sector wage growth increased to 7.6 per cent in the three months to April, according to the latest official data. The labour market figures for May will be released on Tuesday.
Rishi Sunak, prime minister, must decide this month whether to back pay rises of about 6 per cent for public sector workers — the average expected to be recommended by independent review bodies for 2023-24.
Bailey will tell the Mansion House gathering that the BoE is monitoring developments in the labour market closely and is determined to return inflation to the 2 per cent target. Consumer price inflation currently stands at 8.7 per cent.
Financial markets expect the BoE to continue to raise interest rates beyond the current level of 5 per cent.
Sunak and Jeremy Hunt, chancellor, have signalled that pay rises of about 6 per cent for public workers in 2023-24 will not be supported if they fuel inflation. “We will not resolve these public sector pay disputes with any measures that are inflationary,” Hunt told the Financial Times last week.
The governor will say he expects UK headline inflation to “fall markedly over the rest of the year” due to lower energy prices. “Food prices should fall, too, as lower commodity prices feed through to prices in the shops,” he will add.
Hunt is expected to use his own Mansion House speech to support the BoE in curbing inflation. Last week he told the FT he would “double down” in that fight.
Hunt said he would “not pump billions of pounds of additional demand” into the UK economy, adding: “We will not countenance tax cuts if they make the battle against inflation harder.”
The chancellor’s tough line on inflation is intended to address the short-term problems facing the economy but he will also set out a series of “Mansion House reforms” to try to improve long-term growth.
These will include changes to regulations with a view to persuading pension funds to put more of their money into “productive assets”, notably early-stage companies.
Hunt will hail a compact by leading companies to put 5 per cent of their assets in defined contribution pension schemes into unlisted businesses — potentially unlocking up to £50bn of investment for high-growth companies by 2030.
Hunt said before his speech that he would be prepared to require small pension funds to merge, to improve their efficiency and help them invest in assets which would yield a higher return for savers.
He is also expected to propose changes to stock market listing rules to try and make the City a more attractive venue.
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