Andrew Bailey has urged workers not to ask for a big pay rise this year, despite warning that rampant inflation will sting households with the worst squeeze on living standards for at least three decades.
The Governor of the Bank of England said that a “moderation” of wage rises is essential to prevent further overheating in the economy after Threadneedle Street raised interest rates by 0.25 percentage points in a bid to tame spiralling prices.
His comments immediately drew a scathing rebuke from the former Downing Street adviser Dominic Cummings, who said on Twitter that “Bailey was another superduff appointment I tried to kibosh and failed”.
Mr Bailey raised concerns about wage pressure as the nation braces for two years of pain, with the Bank warning of the biggest squeeze on incomes since comparable records began in the 1990s.
Surging energy bills are set to push inflation to 7.25pc in April, its highest level since 1991, according to the institution.
Mr Bailey said that restraint on pay would help stop the inflationary spike becoming embedded in the economy.
Asked in a BBC interview if he was implicitly asking workers not to demand a large pay rise, the Governor said: “Broadly, yes.”
He added: “In the sense of saying, we do need to see a moderation of wage rises, now that’s painful.
“I don’t want to in any sense sugar that – it is painful. But we need to see that in order to get through this problem more quickly.”
Five of the Monetary Policy Committee’s nine members, including Mr Bailey, voted to raise the Bank of England’s base rate from 0.25pc to 0.5pc. The remaining four wanted a faster rise to 0.75pc in a sign of further increases to come this year.
Mortgage lenders immediately raised costs for borrowers, led by Nationwide Building Society and Santander which raised rates on variable mortgages.
The Bank will also start to reverse its £895bn quantitative easing programme. Instead of buying more assets to replace the bonds which mature, the Bank will stop reinvesting the funds and so let the stockpile shrink.
Wages are forecast to climb by no more than 5pc, so will be outstripped by rising inflation and undermined by Rishi Sunak’s National Insurance raid.
As a result real household post-tax incomes will fall by 2pc this year and 0.5pc in 2023. Family finances have not taken a hit on this scale in any calendar year since the Bank’s records began in 1990.
The damage this year will be five times worse than the squeeze on incomes in 2008, during the immediate aftermath of the financial crisis.
Inflation will rise from 5.4pc in December to a peak of around 7.25pc in April, the Bank predicts, as bills jump and the cost of imported goods is pushed up by global supply chain chaos. At the same time the tight jobs market is increasing wages and so adding to the cost of services.
At the start of next year, inflation is still expected to be above 5pc. It is projected to fall back to below the MPC’s 2pc target in the first half of 2024, and even then only if the Bank keeps raising interest rates to 1.5pc by mid-2023 as financial markets expect.
“We have not raised interest rates today because the economy is roaring away. The economy is only now back to the size it was immediately before the pandemic,” he said.
“An increase in bank rate is necessary because it is unlikely that inflation will return to target without it. We face the risk that some of the higher imported inflation could become ingrained within the domestic economy, leading to a longer period of high inflation.”
He acknowledged families are already suffering “a squeeze on real incomes” and higher interest rates “will be felt by households and businesses”.
But he said that the rise in rates – to a level still low by historical standards – will help hold down prices in the years to come.
Ben Broadbent, one of the deputy governors, said that “extraordinary” rises in global energy prices are a key factor beyond the Bank’s control, with even bigger increases than during the oil price shock 50 years ago.
He said: “I think this represents the steepest rise in energy costs for households as a share of income in a year than we have seen ever, including the 1970s.”
Mr Broadbent added that the Bank could not have prevented this spike in inflation, as interest rates act over a two-year time period and so would have required unrealistic foresight into the energy markets.
It would have required the Bank “to have raised interest rates bang in the middle of the first wave of the pandmeic and the lockdown”, he said.