Bank of England governor suggests workers should not ask for big pay rises as it battles inflation

Business

Bank of England governor Andrew Bailey has suggested that workers should not ask for big pay rises as it battles surging inflation.

The Bank has acted to combat accelerating price growth by hiking interest rates to 0.5%.

But if employees ask for wage increases to match the cost of living its task could be made harder.

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Bank governor explains ‘very big shock’ from inflation

That is because of the risk that employers would then pass on those higher wage costs to consumers in the form of prices, creating an inflation spiral.

In an interview after the Bank’s interest rate decision, Mr Bailey told Sky News that the Bank believed that some of the price pressures driving inflation would “correct”.

But he added: “What we have to do is ensure that in the meantime that there isn’t more inflation pressure domestically.

“That would come for instance from things like wage bargaining.”

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In a separate interview, asked if the Bank was effectively asking workers not to demand big pay rises, he told the BBC: “Broadly, yes – in the sense of saying: we do need to see a moderation of wage rises. That’s painful – I don’t want to in any sense sugar that message, it is painful”

The message comes at a time when wage growth is already starting to be outstripped by inflation, meaning a real terms pay cut for workers.

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‘We face a real cost of living crunch’

That squeeze looks like getting even worse over coming months as energy bills for millions of households go up by a typical £693 in the spring and national insurance goes up.

Price pressures are being seen across the board with the cost of a supermarket shop also rising.

Consumer price inflation hit 5.4% in December, its highest rate since 1992, and the Bank of England now thinks it is set to soar past 7%.

It all adds up to what the Bank now forecasts will be the biggest fall in living standards since comparable records began three decades ago.

The Bank’s rate hike adds to that pressure by increasing borrowing costs, with a direct impact falling in two million home owners with variable rate mortgages.

In a news conference after this week’s rate hike, Mr Bailey said: “We have not raised rates today because the economy is roaring away. An increase in Bank rate is necessary because it is unlikely that inflation will return to target without it.”

Confronted with the fact that the rate hike will add to the squeeze on households, Mr Bailey said: “It is a hard message but if we don’t take this action it will be worse.”

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