Bank of England governor’s plea for wage restraint cuts little ice with workers

Receive free UK inflation updates

We’ll send you a myFT Daily Digest email rounding up the latest UK inflation news every morning.

Andrew Bailey told UK workers they would have to rein in wage demands if they wanted inflation to go away, as the Bank of England raised interest rates to their highest level since 2008 this week. The governor’s message went down like a lead balloon.

But economists say the febrile state of the jobs market is now the main reason inflation is so high, and the BoE is unlikely to stop tightening the screws on borrowers until it cools.

“We will get inflation back to its target. To do that . . . we cannot continue to have the current level of wage increases and we can’t have companies seeking to rebuild profit margins,” Bailey said on Thursday following the Monetary Policy Committee’s decision to increase rates by a higher-than-expected 0.5 percentage points.

He added: “The current levels [of price and wage setting], I’ll be absolutely honest, are unsustainable.”

His words cut little ice with angry workers. Across the economy, private sector earnings have grown at a near-record pace of 7.6 per cent over the past year, excluding bonuses. But prices have risen faster: with inflation still at 8.7 per cent in May, average earnings are worth no more than in 2007.

Stagnation in living standards, combined with widespread labour shortages that have boosted workers’ bargaining power, has driven a surge of worker activism that shows little sign of slackening.

In the past week, unions representing rail staff and teachers have set new dates for strike action. A marking boycott by university lecturers could leave thousands of students without grades on graduation.

On Friday, junior doctors announced a further five-day walkout billed as the “longest single period of industrial action in the history of the health service”. A ballot for renewed strike action by members of the Royal College of Nursing also closed on Friday: depending on its outcome, the NHS could face simultaneous walkouts by doctors and nurses. 

Workers are also organising in areas that are hardly hotbeds of militancy. On Monday, Church of England clergy submitted a formal pay claim for the first time in their history, seeking a 9.5 per cent increase in their stipend, while staff at the homeless charity St Mungo’s declared indefinite, all-out strike action.

“Instead of blaming inflation on workers’ wages it’s high time the governor of the Bank of England tackled the profiteers of corporate Britain,” said Sharon Graham, general secretary of the union Unite, which is leading the clergy’s claim and the action at St Mungo’s, as well as campaigns for airport ground staff, factory workers, refuse collectors and other private sector workers.

But market forces have played a bigger part than unions in driving pay growth, which is strongest in higher-paid areas such as finance and business services.

Economists have said rapid pay growth has primarily been a response to rising living costs, in a labour market still recovering from the double whammy of Covid-19 and Brexit. These left employers fighting to recruit from a workforce depleted by ill health and constrained by the end of EU free movement.

“The BoE is having to deal with the product of political decisions and structural forces on which it has little control,” said Gilles Moëc, chief economist at the insurer Axa, arguing that an overheating labour market had more to do with “the shortcomings of the British healthcare system . . . and the limitations of the post-Brexit immigration system” than with “traditional excess demand”. 

But the MPC sees a feedback loop developing, with inflation set to be increasingly fuelled by labour-intensive service prices, rather than energy and food. If wage pressures persist, it will need to raise interest rates again, the committee signalled on Thursday.

There is some evidence the labour market is on the turn. Vacancies have been falling for nearly a year and official data shows the workforce is finally growing again on the back of record inward migration, a return of older workers and a new crop of recent graduates. Surveys suggest it is becoming easier to hire and that pay awards for existing employees have stabilised.

The more dovish members of the MPC argue this justifies leaving interest rates on hold, until the tightening already in place takes full effect. Megan Greene, who will join the MPC later this year, has underlined the risk of a sudden wave of job cuts, if employers who previously worried they would not be able to hire people back “decide it no longer makes sense to hoard workers”.

However, the committee made it clear it did not have enough faith in this survey evidence — whose predictive value “had not been tested in a similar period of high inflation”. Instead, it will want to see concrete evidence the labour market has cooled before it takes its foot off the pedal.

The question is whether this can be achieved without painful job losses. Andrew Goodwin, economist at the consultancy Oxford Economics, warned: “We’re now in a situation where overtightening policy and causing a recession may be the price that has to be paid to bring inflation back to heel.”