BoE governor warns against high pay rises and price increases
The Bank of England governor has urged workers and businesses to resist pushing for high wage and price increases to match inflation.
He tells the Today Programme this would fuel inflation and hurt the least well off in society, in a signal to both companies and unions.
Q: What’s an inflationary pay rise in the current climate?
Andrew Bailey says there isn’t a specific number, but if everyone tries to beat inflation in both price setting and wage setting then it won’t fall.
If everyone tries to beat it, it doesn’t come down, it gets worse, that’s the problem.
The second problem, is that those who are worst hit by inflation are the poorest, who don’t have the bargaining power to protect themselves.
Bailey says:
“I put this in terms of high pay rises and high price increases, because in that world it’s the people who are least well off who are worst affected because they don’t have the bargaining power.
I think that is something that, you know, I would say broadly we all have to be very, very conscious of.”
Q: So that’s your message is that those who do have the muscle….
Bailey explains that the current inflation shock is particularly bad for people on low-incomes as it is concentrated in food and energy — essential staples for us all.
I think there is a role in society to reflect on the fact that there are people who do not have the same ability to offset the effects of inflation, and they are going to be very badly affected by this.
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The Bank of England’s chief economist says the Bank is trying to keep its options open over future interest rate moves.
Huw Pill has told Bloomberg TV that the BoE wants to “ensure there’s an element of flexibility” over borrowing cost changes, so people shouldn’t assume rates will rise by another 50 basis points at its next meeting.
Given the uncertainties we face, I think we need flexibility either to go further, or to stay where we are, and the pace at which we go further to be varied according to circumstances”
But will rising interest rates hit house prices, as it pushes up mortgage costs?
Pill says the Bank expects the housing market to cool, but doesn’t foresee a ‘dramatic downturn’.
World food prices fall, helped by Ukraine wheat deal
We have some good news in the global battle against soaring inflation.
World food prices dropped significantly in July, according to the United Nations food agency’s world price index, further below their record highs after the Ukraine invasion began.
The UN’s Food and Agricultural Organization says the Black Sea export deal agreed between Russia and Ukraine last month was a key factor.
Its Cereal Price Index dropped by 11.5% last month, with wheat leading the price falls.
World wheat prices dropped by as much as 14.5%, FAO said, partly in reaction to the Russia-Ukraine deal on grain exports from key Black Sea ports, and also because of seasonal availability from ongoing harvests in the northern hemisphere.
Prices of vegetable oil, sugar and meat also dropped, pulling the FAO’s index of the most globally traded food commodities down to 140.9 points last month, from 154.3 in June.
But, the FAO warned that the bleak global economic outlook could threaten food security.
“The decline in food commodity prices from very high levels is welcome, especially when seen from a food access viewpoint,” said Maximo Torero, FAO Chief Economist.
“However, many uncertainties remain, including high fertilizer prices that can impact future production prospects and farmers’ livelihoods, a bleak global economic outlook, and currency movements, all of which pose serious strains for global food security.”
Here’s Helen Goodman, professor in practice at Durham University’s School of Government and International Affairs, on this morning’s interviews:
The Bank has come under fresh political fire this morning, from business minister Kwasi Kwarteng.
Kwarteng, who is backing Liz Truss, argues that the Bank was too slow to respond to rising inflation in 2021.
Kwarteng told Sky News:
“There is an argument – and I think it’s a strong one – to say that inflation was an issue that was identified at the beginning of last year.
“If your target is 2% and you’re predicting 13%, something’s gone wrong. And you’ve got to look at how the bank is organised and what the what the targets are,”
Inflation was just 0.4% in February 2021, when the UK was still in a Covid-19 lockdown. But it then started climbing, and by May 2021 was above the Bank’s 2% target.
However, the BoE resisted raising interest rates until its final meeting of 2021, worried that unemployment would jump when the furlough scheme ended that autumn.
Asked whether the BoE would keep its independence in a Truss-led government, Kwarteng said:
“It’s absolutely going to keep its independence.”
And Kwarteng also argued that cutting the tax burden, as Truss plans, will help:
“I’ve never understood why if we’re going to help people, how are we going to help people by putting up their taxes? Especially when their daily shop, their costs, are going up.
“What’s very clear to me from what the Bank of England said yesterday is that more of the same, just simply carrying on with our economic policy at the moment, is not going to cut it, it’s not going to help us get out of this difficulty.”
Andrew Bailey also says he doesn’t know what ‘normal’ interest rates will be in future, but they’re not going back to their levels before the 2008 financial crisis.
And he argues the Bank’s plan to start selling government bonds purchased under its £895bn quantitative easing programme will not have a ‘big impact’ on the cost of government borrowing.
“We don’t think that the rolling back of QE and the sale of assets is going to have a big impact on market interest rates”
BoE governor warns against high pay rises and price increases
The Bank of England governor has urged workers and businesses to resist pushing for high wage and price increases to match inflation.
He tells the Today Programme this would fuel inflation and hurt the least well off in society, in a signal to both companies and unions.
Q: What’s an inflationary pay rise in the current climate?
Andrew Bailey says there isn’t a specific number, but if everyone tries to beat inflation in both price setting and wage setting then it won’t fall.
If everyone tries to beat it, it doesn’t come down, it gets worse, that’s the problem.
The second problem, is that those who are worst hit by inflation are the poorest, who don’t have the bargaining power to protect themselves.
Bailey says:
“I put this in terms of high pay rises and high price increases, because in that world it’s the people who are least well off who are worst affected because they don’t have the bargaining power.
I think that is something that, you know, I would say broadly we all have to be very, very conscious of.”
Q: So that’s your message is that those who do have the muscle….
Bailey explains that the current inflation shock is particularly bad for people on low-incomes as it is concentrated in food and energy — essential staples for us all.
I think there is a role in society to reflect on the fact that there are people who do not have the same ability to offset the effects of inflation, and they are going to be very badly affected by this.
Bailey: Firms aren’t struggling to raise prices
Q: What’s the point in raising interest rates, if the inflationary shock is coming from global energy and food prices?
Bailey says the real risk is that inflation becomes embedded, following a domestic shock and a fall in the labour market over the last two years.
Firms are telling him that they’re struggling to find workers, and not finding it hard to raise prices.
The economy is ‘still robust’ in the eyes of businesses, he says, and if inflation becomes embedded it becomes worse.
Bailey says:
The first thing they want to talk to me about is that businesses have trouble hiring people, and that is still going on. They’re also saying to us actually they’re not finding it difficult to raise prices at the moment.
That can’t go on.
Bailey denies being too slow to raise interest rates
Andrew Bailey has denied that the Bank acted too late to tackle the UK’s inflationary threat, following criticism from allies of Liz Truss.
No-one knew a year, two years ago, that there would be a war in Ukraine, he tells the Today Programme.
Q: But inflation hit 30-year highs in December, before the Ukraine invasion.
Bailey points out that the Bank has been raising interest rates since December, and before that point the economy was still recovering from the pandemic.
If the Bank had acted faster, it would have risked bringing forward a recession – if the furlough scheme had led to an increase in unemployment
Q: Attorney General Suella Braverman says rates should have been raised a long time ago – you’re saying very plainly that is wrong?
I am saying that, Bailey replies:
“If you go back two years, which is, given the monetary transmission mechanisms, where we’d have to go back to, given the situation we were facing at that point in the context of Covid, in the context of the labour market, the idea that at that point we would have tightened monetary policy, you know I don’t remember there were many people saying that.”
Bailey adds that he looks forward to an ‘active engagement’ with the new government, and the Bank is always there to support taking public policy forward.
Bailey: Open to discussions with government over how regime works
The Today Programme are playing their interview with Bank of England governor Andrew Bailey now.
Asked about the political storm around the BoE’s handling of the crisis, Bailey says central bank independence is ‘critically important’, but its job is to get inflation back to target.
Bailey insists he intends to serve his full eight-year term as governor (which runs until 2028).
Q: Would changes to your current terms of independence be damaging, or are you open to change?
Bailey replies that he doesn’t see a large desire to question central bank independence, but he’s very happy to discuss the details of the current regime.
He rejects claims that the Bank is not accountable – it’s accountable to parliament, and he testifies to MPs regularly.
Bailey also points out that the government sets the Bank’s target for price stability (currently 2% inflation).
I’m open to any discussions with the government about how they think the regime should operate, Bailey adds.
UK house prices fall for first time in a year
Mark Sweney
UK house prices fell for the first time in more than a year in July, as the country’s largest lender warned of the impact of higher interest rates and the broader cost of living crisis.
The average price of a home was £293,221 last month, down 0.1% month on month, the first decrease since June last year, according to the latest report from Halifax.
The marginal drop pushed down the annual rate of growth from 12.5% to 11.8%, although overall house prices remain more than £30,000 higher than at the same time last year.
Russell Galley, Halifax’s managing director, says households are being squeezed by rising borrowing costs:
“While we shouldn’t read too much into any single month, especially as the fall is only fractional, a slowdown in annual house price growth has been expected for some time.
“Leading indicators of the housing market have recently shown a softening of activity, while rising borrowing costs are adding to the squeeze on household budgets.”
Here’s the full story:
Here’s some reaction:
House prices inched down 0.1% in July, says @HalifaxBank. “A slowing of annual house price inflation still seems the most likely scenario,” it says. But prices climbed 11.8% over the year, a rise of more than £30,000. That’s still a rise of £82 a day pic.twitter.com/bz4g24jKS8
— simon read (@simonnread) August 5, 2022
AVG UK house prices fell 0.1% in July. Is this the beginning of a gradual descent or a summer respite? A typical UK property now costs £293,221 down £365 on last month. Those who do want to sell, maybe more motivated to do so with this first cold snap @HalifaxBank HPI pic.twitter.com/Km5FQR1zYC
— Emma Fildes (@emmafildes) August 5, 2022
IFS: Next PM must find billions of new support
Britain’s next prime minister must find billions of pounds of support for households and public services, Paul Johnson, director of the Institute for Fiscal Studies think tank, has said.
Speaking to BBC Radio 4’s Today programme about the Bank of England’s forecasts, Johnson warned that the Conservative leadership debate is not focusing on the challenges facing the public finances.
Johnson said high inflation could give a short-term lift to tax revenues (from higher wages and prices)….
But the thing that I find remarkable about the Conservative leadership debate is that they don’t seem to be talking about the things that’s really going to be in need of public finances.
“The first is, of course, they’re going to have to find many more billions to support households. I mean, this is a much bigger increase in energy bills than was expected even a few months ago when the support packages were announced, and that’s not going to be helped by the sorts of tax cuts that are being talked about.
Johnson also warns that some struggling public services face “potentially big real-terms cuts”
“Secondly, of course, there’s going to need to be more money for public services – the health service education and so on – because with inflation at 13%, and pay rises there in the 5-6% range, that means that the level of increases that were put in place this year and announced a year ago are looking far too small, because that was done in the expectation that inflation will be 3-4%.
Labour MP Barry Sheerman tweets:
Paul Johnson more sane & sensible than any available cabinet minister @BBCr4today
— Barry Sheerman MP (@BarrySheerman) August 5, 2022
The UK is facing ‘a juggernaut’ that will smash through family finances, warns Labour’s shadow work and pensions secretary Jonathan Ashworth.
Ashworth told the Today Programme that households need more support to cope with surging energy bills:
“There will be families and pensioners across the country waking up this morning reading the news who are absolutely terrified because a juggernaut is heading its way which will smash through family finances.
So, action is needed. We’ve got time to plan.
“The package that was announced to support families cope with energy bills is clearly not enough if we’re talking about energy bills of over £4,000, that’s nearly half the full state pension.
“So, we would reduce VAT on energy bills, we wouldn’t be giving £4bn worth of tax breaks to gas and oil companies as the Government is doing, we would be retrofitting homes.”
‘The big squeeze’: what the papers say about Bank of England’s recession forecast
Today’s UK newspapers are dominated by the Bank of England’s prediction that the UK is heading into a long recession:
The Financial Times goes big with a “red alert” graphic showing GDP and inflation alongside an image of Bank governor Andrew Bailey, under the headline:
“BoE warns of long recession as interest rates rise by half-point”. It notes that the outlook is worse than that of the US or the EU.
“Britain slides into crisis”, says the Times, creating a similar graphic showing interest rate rises, under the title “black Thursday”.
Economics editor Mehreen Khan says the Bank “unleashed a catastrophic set of forecasts that would have been scarcely believable a year ago”.
Today’s Guardian leads on the Bank’s latest rate rise and the forecast of 13% inflation. It lays the blame squarely on Vladimir Putin over his invasion of Ukraine, quoting Bailey’s line that “there is an economic cost to the war”.
Guardian front page, Friday 5 August 2022: Bank raises rates and warns of 13% inflation. Plus special report on global heating: The burning issue pic.twitter.com/lQceGMMxMR
— The Guardian (@guardian) August 4, 2022
The Daily Mail calls Andrew Bailey “The banker who is running out of credit”, saying the Bank faced a ferocious backlash last night for not acting sooner.
My colleague Graham Russell has all the details here:
Yesterday’s hefty rise in UK interest rates, from 1.25% to 1.75%, probably won’t be the last in this cycle, despite the looming recession.
Amarjot Sidhu, economist at BNP Paribas Markets 360, predicts rates could reach 2.5% by the end of the year:
In forecasting a prolonged recession and implicitly pointing to rate cuts eventually, the Bank of England stands apart from its peers despite delivering a similarly oversized hike.
In the short-term, the BoE is not done fighting inflation though, and we still see three more 25bp hikes this year.
Sidhu also believes the Bank’s medium-term forecasts for both growth and inflation will prove overly pessimistic.
Andrew Sentance, a former MPC policymaker, argued yesterday more steep rises are needed:
The #MPC has bitten the bullet – a 0.5 percent interest rate rise.A bigger rise could be justified this month but at least we have moved away from the 0.25 percent baby steps. We need to move up to 3-4 percent interest rates by the end of this year.
— Andrew Sentance (@asentance) August 4, 2022
Bank of England governor Andrew Bailey has hit back against criticism over his handling of the crisis, as pressure on Britain’s top central banker grows.
In an interview with the BBC’s Today Programme that we’ll hear later, Bailey has denied the Bank had been too slow to start raising interest rates.
Yesterday, attorney general Suella Braverman said interest rates should have been raised a long time ago (the Bank started raising rates last December)
The two candidates to become the next prime minister clashed over the solution to the crisis last night.
Liz Truss claimed a recession wasn’t inevitable, and that cutting taxes would help the economy grow. She’s promising an emergency budget if she succeeds Boris Johnson.
But Rishi Sunak, who appeared after Truss for a grilling from Conservative members on Sky News, stepped up his criticisms of Truss’s £30bn plan for unfunded tax cuts, claiming it would lead to “misery for millions”.
Sunal warned:
“The lights on the economy are flashing red, and the root cause is inflation. I’m worried that Liz Truss’s plans will make the situation worse.
“If we just put fuel on the fire of this inflation spiral, all of us, all of you, are going to just end up with higher mortgage rates, savings and pensions that are eaten away, and misery for millions.”
Here’s the full story, by my colleague Heather Stewart:
Introduction: UK faces ‘deepening economic crisis’ as recession looms
Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.
The UK is heading into deepening economic misery, after a horror show of economic forecasts from the Bank of England yesterday.
Britain faces a bleak outlook — heading into a recession this winter that will last over a year, with inflation surging over 13%. Unemployment will rise and households will face a historical squeeze on living standards following the sharp jump in gas prices, the BoE said.
The economic costs of Vladimir Putin’s invasion of Ukraine have mounted, on top of an economy already hurt by the pandemic, and adjusting to the reality of Brexit.
The Bank’s grim warning came alongside the biggest rise in interest rates by the most in 27 years on Thursday, as its policymakers desperately try to get a grip on inflation (currently 9.4% and heading higher).
Jack Leslie and James Smith of Resolution Foundation have analysed the Bank’s monetary policy report, and say its forecasts are ‘disastrous’ for living standards.
Despite the Government spending over £30bn in support, the Bank is forecasting that the economy will fall into recession later this year, contract for six successive quarters and not recover its pre-pandemic level within the forecast period (ending mid-2025). Inflation is now projected to peak higher – at an eye-watering 13.3% in October – and high inflation will now be with us for longer.
All this is disastrous for living standards: the Bank now expects that real household disposable income will fall by around 3.7% over the course of 2022 and 2023 – the largest such fall on record.
To pile misery onto families, the Bank forecasts that unemployment will rise by roughly 900,000 people; the Bank sees this as sufficient to keep inflation from becoming entrenched.
What do today’s @bankofengland announcements mean for households? Average real post-tax household incomes are expected to fall by around £2,000 across this year and next. The Government will inevitably need to do more to shield families from the worst effects of this crisis. pic.twitter.com/NN1AxQ5152
— Resolution Foundation (@resfoundation) August 4, 2022
But the big news is the Bank’s grim outlook for this winter, with inflation forecast to peak at 13.3 per cent in October – higher the previously thought. In addition, this high inflation is also expected to last longer, reflecting higher gas prices. pic.twitter.com/mQeQmQ2NCv
— Resolution Foundation (@resfoundation) August 4, 2022
A weaker economy is projected to lead to a rise in the unemployment rate from its current level of 3.8 per cent to above 6 per cent. This, combined with higher and long-lasting inflation, means that real household disposable income could fall by 3.7 per cent across 2022 and 2023. pic.twitter.com/hmvD99wtJT
— Resolution Foundation (@resfoundation) August 4, 2022
Rising energy prices will lead families and businesses to cut back spending on other items, with higher prices overall meaning spending will not go as far. This leads to a significantly weaker outlook for the economy – hence the Bank expecting a recession in Q4 this year. pic.twitter.com/5DfOS77jKN
— Resolution Foundation (@resfoundation) August 4, 2022
Leslie and Smith says there is no quick fix to rising energy costs. So the next prime minister must do more to shield families from the worst effects of the crisis, focused on low-to-middle income households.
All this lays bare the challenges for the next Prime Minister: although they might hanker after a honeymoon period, the reality is that the deepening economic crisis will be top of their ‘to-do’ list – and in particular providing support focussed on low-to-middle-income households – when they step into 10 Downing Street on 5 September.
Also coming up today
The latest US jobs report is due later, showing the health of America’s employment market as its economy slows. Economists predict job creation slowed in July, to 250,000 from 372,000 in June.
The agenda
- 7am BST: Halifax house price index for July
- 1.30pm BST: US jobs report for July
