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Bank of England Governor Andrew Bailey on Tuesday claimed the tight labour market is keeping pricing pressures elevated as he admitted inflation is falling more slowly than had been hoped.
Bailey, who became governor in March 2020, was giving evidence to the economic affairs committee of the House of Lords, after figures showed that wage growth had accelerated in the three months to May, ahead of City forecasts, while the unemployment rate fell.
‘As I‘m afraid this morning’s numbers illustrate, we‘ve got a very tight labour market,’ Bailey said. ‘We still think the rate of inflation is going to come down, but it’s taking a lot longer than we expected.’
Bailey thinks this could continue with firms reluctant to lose staff given the difficulty in finding replacements.
‘One of the things firms, pretty much universally, say to me, and have been saying to me for a while is that they find it so hard to recruit labour in the current market that they are not going to release labour into the market,’ Bailey told the committee.
‘There is labour hoarding going on. Firms will adjust hours if they need to, but they will be very reluctant to make people redundant. So we‘ve built that into our judgement into how the tightness of the labour market is going to reflect on inflation.’
But he remained adamant the Bank would get pricing pressures under control. ‘We will bring inflation down we will use monetary policy to bring it back. The question is, how much? The structural point is really around the labour market.’
Earlier Tuesday, figures from the Office for National Statistics showed the UK unemployment rate edged down to 3.8% in the three months to April from 3.9% in the three months to March. Market consensus, as cited by FXStreet, had expected unemployment to rise to 4.0%.
Exacerbating the difficulties for the UK’s central bank was the accompanying news that wage growth had accelerated in the three months to April.
Annual growth in average total pay, including bonuses, picked up to 6.5% from 6.1% in the three months to March. This came above market consensus, which expected pay growth to hold steady.
Excluding bonuses, annual average earnings growth was 7.2% in the three months to April, compared to 6.8% in the previous three months. This was above expectations of 6.9% growth.
ING Economics said: ‘Faster-than-expected wage growth points to a rate hike in June and potentially August, and is a reminder that pay pressures are likely to ease only gradually.
‘That doesn’t necessarily suggest the Bank of England needs to raise rates as aggressively as markets expect, but it does imply that rate cuts are some way off.’
The Monetary Policy Committee meets next week with its interest rate decision on Thursday, June 22. Markets predict a 25 basis point increase in rates although some economists believe a 50bp rise may be on the agenda.
Bailey also admitted policymakers ‘were wrong’ about the impact of the end of furlough on inflation in 2021, when the surge in prices began.
‘The real challenge was the furlough scheme, which was extended from April to September, and right up to the last day there were a million or so jobs on the furlough scheme,’ he noted.
‘The question for us was what is going to be the consequence of that scheme ending? Are we going to see slack [in the number of people in work]?’
‘We thought unemployment would rise. We were wrong, frankly,’ Bailey said.
Earlier, Megan Greene, who will join the Bank of England’s Monetary Policy Committee in July, told MPs that there was still pressure on inflation coming from a tight labour market with fast wage rises.
Greene is global chief economist at Kroll, a US private investigations and financial advisory firm, and will join the MPC as an external member on a three-year term.
She replaces outgoing external economist Silvana Tenreyro.
‘There are second round effects that seem to be seeping in,’ she told the Treasury Committee of the House of Commons.
She also indicated that the bank might find it difficult to return inflation to its 2%.
‘I think that there is some underlying persistence and so getting from 10% to 5% ... is probably easier than getting from 5% to 2%.’
She also warned about the risks of relaxing monetary policy too soon.
‘If you engage in stop-start monetary policy, you may end up having to tighten even more and generating an even worse recession on the other side.’
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