Brits face more interest rate hikes as wages surge again with Bank of England chiefs warning inflation could come in above expectations and they would rather overreact than do too little
Brits are facing the prospect of more interest rate hikes after wages surged again – with Bank of England chiefs warning inflation could come in above expectations.
Incoming deputy governor Sarah Breeden said prices are more likely to overshoot than undershoot forecasts.
Meanwhile, her new colleague on the Monetary Policy Committee, Catherine Mann, has said she wants to ‘err on the side of over-tightening’.
The grim signals came despite governor Andrew Bailey recently hinting at a respite by suggesting that interest rates were ‘nearing the top’.
The latest official figures today showed that wages are still rising near record pace, with regular pay going up 7.8 per cent annually in the quarter to July.
That meant earnings were finally matching inflation for the first time since October 2021.
The Bank of England could hike interest rates again from 5.25 per cent this month
Incoming deputy governor Sarah Breeden said prices are more likely to overshoot than undershoot forecasts
The latest official figures today showed that wages are still rising near record pace, with regular pay going up 7.8 per cent annually in the quarter to July
However, there are concerns that inflation will bump upwards once more when data are released next month, largely due to fuel costs.
Markets are anticipating at least one more increase this month from the current level of 5.25 per cent to 5.5 per cent – but there are mixed views on how much higher the base rate will go.
Ms Breeden was giving evidence to MPs as they confirm her appointment as deputy governor for financial stability, replacing Sir Jon Cunliffe.
She said that so-called second-round effects, where workers ask for higher wages because the cost of living is rising, and businesses price their products higher to offset their rising costs, are stronger than had been expected.
‘Turning to risks to the UK outlook, I agree with the MPC that the risks to inflation around the August forecast are skewed to the upside,’ she said.
‘We have learned, in particular, that second-round effects via price and wage setting are stronger than had previously been expected.’
She said that inflation was likely to reach around 5 per cent by the end of the year, which would mean that the Government’s target to halve inflation would be met.
But Ms Breeden told MPs: ‘I think the challenge right now is that wages are high and rising and there is a real risk that the second-round effects mean that this inflation becomes embedded.
‘I would say we are not forecasting a recession … it is not our intent to cause a recession, and the MPC will be very careful as it takes its decisions.’
Inflation could have been around three to five percentage points higher than it is if the MPC had not hiked interest rates over the last two years, she said.
But she added that if they wanted to totally offset rising inflation, the MPC members would have had to increase rates twice has fast as they had, which could have sent shockwaves through the economy.
In a speech given at the Canadian Association for Business Economics yesterday, Ms Mann – known as one of the hawks on the MPC – said: ‘To pause or to hold the policy rate lower for longer risks inflation becoming more deeply embedded, which would then require more tightening in total, to both change inflation itself and to wring-out the embedded inflation that comes from the sustained duration above target.
The grim signals came despite governor Andrew Bailey recently hinting at a respite by suggesting that interest rates were ‘nearing the top’
‘This is why I would rather err on the side of over-tightening.’
She went on: ‘But, if I am wrong, and inflation decelerates more quickly and activity deteriorates more significantly, I will not hesitate to cut rates.’
The latest ONS figures showed total pay – including bonuses – was running at 8.5 per cent annually in the quarter to July, 0.6 percentage points ahead of prices.
That metric had caught up with inflation in the previous quarter, largely thanks to lump sums in public sector pay deals.
However, there were worrying signs for the economy as unemployment nudged up to 4.3 per cent and vacancies dipped.
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