Catherine Mann, a member of the Bank of England's Monetary Policy Committee (MPC), has issued a warning about the potential consequences of substantial wage demands on inflation and interest rates. Her comments come in the wake of the MPC's decision to maintain interest rates at 5%, contrasting with recent rate reductions in the United States and Europe.
Mann emphasized the need for sustained high rates to effectively combat inflation in the UK economy. She stated, "Workers may reasonably seek sustained above-equilibrium wage growth to recover the loss in purchasing power." However, she cautioned that this, combined with slow productivity growth, could prolong inflation above the 2% target.
The Bank of England, founded in 1694, has been grappling with persistent inflation, which has proven more stubborn in the UK compared to the US and eurozone. This situation may necessitate higher interest rates in Britain for an extended period, potentially prolonging financial challenges for homeowners facing increased mortgage costs.
Recent weeks have seen public sector workers, including junior doctors, receive above-inflation pay rises under the current Labour government. Junior doctors were granted a 22% increase, while train drivers received nearly 15%. Despite these substantial raises, there are indications of potential further industrial action.
Mann expressed concern about the UK's "sticky" inflation, particularly in the services sector. She noted, "Services price inflation has proven to be much stickier and in particular has been higher on average than in the other two regions." This trend suggests a higher risk of prolonged overall inflation in the UK.
The policymaker's remarks highlight the delicate balance the Bank of England must strike between controlling inflation and supporting economic growth. The MPC, which meets eight times a year to set interest rates, faces the challenge of navigating these complex economic conditions.
"Structural behaviours in UK labour and product markets appear to have systematically embedded inflation. Policy therefore needs to remain restrictive for longer to purge these behaviours."
Mann, who joined the MPC in September 2021, advocated for maintaining higher interest rates for an extended period to ensure inflation is effectively controlled before considering more aggressive rate cuts.
The ongoing economic challenges in the UK, exacerbated by the COVID-19 pandemic and the energy crisis partly triggered by the Russia-Ukraine war, have significantly impacted living standards. Mann suggested that these shocks may have permanently altered the trajectory of real consumption in the UK, unlike in the US or eurozone.
As the Bank of England continues to navigate these economic headwinds, the impact of its decisions will be closely watched by businesses, workers, and homeowners alike. The coming months will be crucial in determining whether the UK can successfully balance wage growth, productivity, and inflation control.