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Public sector pay should take falling inflation ‘into account’, says BoE

Bank of England governor Andrew Bailey has called on public sector workers to take into account the central bank’s view that inflation will “fall very rapidly” when asking for pay rises.

Under pressure from MPs to comment on the strike action that has hit the health service, schools, transport and the civil service, Bailey told the Treasury select committee on Thursday that it was important to recognise that inflation will fall this year when setting public sector pay.

The central bank predicts it will drop from 10.5 per cent to 4 per cent by the end of 2023.

“You have to be forward looking, here,” Bailey said. “What I would urge, particularly going forward because we believe inflation is going to fall very rapidly, is that that is taken into account.”

The BoE governor stressed that public sector pay was not his responsibility and that he was not advocating a particular settlement for different groups of workers, but that he agreed with ministers that there were economic effects of higher pay settlements.

“I don’t think you can say there’s no effect,” Bailey said, adding that the precise relationship between public sector pay and inflation depended on how any pay rises were funded.

“The economics of it depends on whether you raise taxes [to fund public pay increases] or borrow, frankly,” he told MPs.

Allies of Jeremy Hunt, the chancellor, seized on Bailey’s remarks to justify the Treasury’s tough stance on public sector pay. Talks with unions are deadlocked after ministers refused to reopen pay offers for the current financial year.

“It’s tough but the chancellor has to resist inflation-busting public sector pay increases to finish off the mission to halve inflation this year,” said one.

The BoE this year agreed a 3.5 per cent overall pay raise with its staff, with an additional one-off top up of 1 per cent.

Bailey’s noted that private sector wage rises were higher than those in the public sector and also needed to come down if the BoE was going to hit its 2 per cent inflation target. He also worried that aggressive company pricing policies would keep inflation too high for too long.

“We are concerned about persistence [of inflation] and that’s why, frankly, we raised interest rates this time,” he said, referring to the central bank’s decision to raise interest rates by half a percentage point to a 15-year high of 4 per cent earlier this month.

Explaining why the bank’s Monetary Policy Committee was still raising interest rates even as inflation was starting to come down, he added: “I am very uncertain particularly about price-setting and wage-setting in this country.”

Other members of the MPC agreed that if there were high public sector pay rises, the BoE would have to take them into account and they would make it more likely rates would have to rise further.

Huw Pill, the BoE’s chief economist, said that high natural gas prices meant the UK was poorer than hoped and a “fight for a bigger share of a smaller pie” would fuel inflation.

Pill, like Bailey, made clear that he did not advocate public sector workers getting lower pay rises than those in the private sector or those receiving incomes from the government, but there would be consequences if pay increased.

“[It] implies monetary policy will be tighter to keep aggregate behaviour in the economy in line with price stability,” he said.

These fears of persistent wage and price pressures persuaded the majority on the MPC to put more weight on short term factors affecting wages and prices, rather than their medium term forecast that inflation will drop below 2 per cent.

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