Workers must stop demanding higher wages and businesses refrain from repairing profit margins if inflation is to come down from current “completely unsustainable” levels, Bank of England Governor Andrew Bailey said.
(Bloomberg) — Workers must stop demanding higher wages and businesses refrain from repairing profit margins if inflation is to come down from current “completely unsustainable” levels, Bank of England Governor Andrew Bailey said.
In a pooled broadcast clip, Bailey also signalled that rate setters were prepared to push the country into a recession if necessary to curb soaring prices.
He was speaking shortly after the BOE took markets, businesses and economists by surprise with a half-point increase in interest rates to 5%. A quarter-point rise was expected but the vote was overwhelmingly in favor of moving faster. Seven of the nine members of the Monetary Policy Committee backed it.
“We’ve got to get inflation and we will get inflation back to its target,” Bailey said. “To do that we cannot continue to have the current level on wage increases and we can’t have companies seeking to rebuild profit margins, which means prices continue to go up at current rates.”
“What I would say is we expect inflation to come down and it’s important that price setting and wage setting reflects that because the current levels are absolutely unsustainable.”
The comments are remarkably similar to those earlier this year from BOE Chief Economist Huw Pill, who said households and businesses needed to accept they would be poorer. Both Bailey and Pill later apologized for those comments.
Inflation is stuck at 8.7%, the highest among G-7 advanced economies, and core inflation is rising. Core inflation, which strips out volatile energy and food prices to measure how much is embedded domestically, is at 7.1%. Regular private sector pay is growing at 7.6%. None of that is consistent with the BOE’s 2% inflation target.
Asked whether the BOE was willing to cause a recession to get inflation down, Bailey said: “We are not expecting or desiring a recession, but we will do what is necessary to bring inflation down to target.”
He rejected criticism that the BOE had acted too slowly. “We have raised interest rate by nearly 5% in 18 months so we have taken decisive action,” Bailey said.
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