UK economy’s 'unexpected slowdown’ helping fuel inflation, Bailey warns

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Bank of England Governor Andrew Bailey warned on Monday that an „unexpected slowdown” in Britain’s economy has exacerbated wage and demand pressures, fueling stubbornly high inflation.

At the annual Mansion House dinner in the City of London, he is set to say that current wage deals are unsustainable if the central bank is to meet its goal of keeping inflation down to its 2 percent target: “It is vital that we look at jobs. by.”

Bailey will say with City figures 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, with the unemployment rate at 3.8 per cent.

He would say that no one wants to „see higher unemployment or weaker growth” but that inflation is proving „much stickier than previously expected”. A copy of his speech Published by Central Bank.

„The combination of higher target inflation with labor market tightness and demand pressures in the economy has made underlying developments in goods and services price inflation stickier than previously expected,” says Bailey.

„Both price and wage growth at current levels are inconsistent with the inflation target.”

Annual wage growth in the private sector increased to 7.6 percent in the three months to April, according to the latest official data. Labor market data for May will be released on Tuesday.

Rishi Sunak, the prime minister, must decide this month whether to roll back a pay rise of around 6 per cent for public sector workers – an average expected to be recommended by independent review bodies for 2023-24.

Bailey will tell the Mansion House meeting that the BoE is closely monitoring developments in the labor market and remains committed to returning inflation to the 2 percent target. Consumer price inflation is currently at 8.7 percent.

Financial markets expect the BoE to continue raising interest rates beyond the current 5 percent.

Sunak and chancellor Jeremy Hunt have signaled that a pay rise of around 6 per cent for public workers in 2023-24 would not be supported if inflation were to hit. „We will not solve these public sector pay discrepancies with inflationary measures,” Hunt told the Financial Times last week.

The governor will say he expects UK core inflation to „decline markedly throughout the year” due to lower energy prices. „Food prices should also come down, with lower commodity prices feeding prices in stores,” he adds.

Hunt is expected to use his own Mansion House speech to back the BoE on reining in inflation. Last week he told the FT he was „doubling down” on that fight.

Hunt said he would „not inject billions of pounds of extra demand” into the British economy: „We will not oppose tax cuts if they make the fight against inflation harder.”

The president’s tough line on inflation is aimed at addressing short-term problems facing the economy, but he is also setting out a series of „mansion house reforms” that will try to boost long-term growth.

That includes changes to regulations aimed at encouraging pension funds to put their money into „productive assets,” particularly early-stage companies.

Hunt praises leading companies putting 5 per cent of their assets into defined contribution pension schemes in unlisted businesses – unlocking £50bn of investment in high-growth companies by 2030.

Before his speech, Hunt said he was open to consolidating smaller pension funds, improving their performance and helping savers invest in higher-yielding assets.

He is expected to propose changes in stock market listing rules to make the city a more attractive destination.