(Bloomberg) -- Bank of England Governor Andrew Bailey called for workers to hold off on demands for higher pay, saying the nation needs to focus on keeping inflation in check despite the mounting cost of living squeeze.
With rising prices eating away at the value of people's incomes, Bailey said his goal is to halt an upward spiral of inflation that would come with expectations for bigger salaries.
“We do need to see a moderation in wage rises,” Bailey said in an interview with the BBC on Thursday. “That's painful. I don't want to in any sense sugar that message.”
The call risks drawing allegations of insensitivity given it came hours after his central bank raised interest rates and households faced the prospect of even higher energy prices. Bailey is on a salary of almost 500,000 pounds ($680,000).
Speaking to ITV News, the governor repeated his point. “We're seeing signs of upward pressure in wage bargaining. The labor market is tight. We do need to see restraint in the growth of wages,” Bailey said.
The remarks highlight the dilemma the BOE faced in its decision to raise rates for a second time since December.
Policy makers expect inflation to reach 7.25% this year, more than triple their target, but tighter monetary policy will depress growth and hurt hard-pressed workers who are braced for higher taxes and energy prices.
“They are in unchartered territory,” said David Owen of Saltmarsh Economics. “We've had worse terms of trade shocks before, in the 1970s and 1980s. But we haven't experienced one like this since the U.K. started targeting inflation in 1992.”
Bailey said that unlike previous rate hike cycles “this is not a standard demand-driven rise” but a response to surging prices of imports, most notably natural gas. Gas prices have risen more than 400% in the past year, driving up the cost of electricity, transportation and manufactured goods.
The most recent terms of trade shocks were caused by oil price spikes in 2008 and 2011, but at that time the BOE was cutting rates. Now, it has little choice but to move them higher.
“We face a trade-off between strong inflation and weakening growth,” Bailey said. “If we don't take this action it would be even worse.”
The BOE expects underlying pay settlements to peak of close to 5%, a level not seen in 21 years. In 2001, inflation was 2% and real incomes were booming.
This time, though, high inflation will mean real pay is shrinking by 2%, the biggest fall in real incomes over a consecutive four quarter period since 2011. Bailey said the BOE's job was to prevent those price rises becoming “ingrained” and that he wanted “restraint” in pay, despite the squeeze on household budgets.
“If we let that process rip as it were it's not going to solve the problem, it's going to get worse (inflation), particularly for those people who aren't able to bargain on their wages, and many people aren't able to,” he told ITV News.
The BOE estimates that its two rate rises so far will add about 300 pounds a year to the typical 140,000 pound mortgage on a 17-year term. That is equivalent to twice the level of the rebate on council taxes that the government is giving households to ease the cost of living blow.
The report also showed that unemployment will rise from 4% to 5% if interest rate rises rise to 1.5%, as markets expect. Were unemployment to remain stable, joblessness would remain “close to its current rate.”
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