The governor of the Bank of England has warned that further interest rate rises are likely as the labour market remains tight.
“It is still a very tight labour market, as yesterday’s labour market statistics demonstrated,” Andrew Bailey told the Treasury select committee. While that remains, it is likely the Bank will increase interest rates further.
The latest statistics show that total wages (including bonuses) have jumped by 6% in the last year but inflation has eaten it all.
However, the Bank of England's newest interest rate-setter Swati Dhingra said thee BoE could deepen an expected recession if its pushes up rates further.
"You could think of getting into a much deeper, much longer recession if rates continue to rise because there is already about a fairly sizeable chunk of the previous rate rises that have got to take effect in terms of what they do to GDP," Dhingra told the Treasury Committee.
"There is a risk of over-tightening, and that's the thing I am worried about at this point,” she added.
Dhingra also told MPs that people who enter the labour market in a recessionary environment end up with “perpetually lower wages”, meaning younger workers will suffer long-term damage from the recession.
Asked whether the Bank of England had been slow to respond to rising inflation, the governor said it had been hard to foresee the series of shocks that have hit the UK economy.
He pointed out that the UK economy has suffered several "supply shocks", including supply chain issues in the fall-out from Covid, a very tight labour market in the UK and the war in Ukraine.
"It was a very difficult call to make this time last year... with the benefit of hindsight, obviously things would have been different."
He added: "If we had only had one supply shock, I think the response to that would be very different, where we’ve had this series of supply shocks."
Catherine Mann, an external member of the Monetary Policy Committee, said she has voted for higher interest rates due to data showing price expectations have risen.
She said that by “front-loading”interest rate rises, you have a better chance of controlling inflation.
But she did admit that the inflationary shock of rising energy and goods prices are dominating the inflation numbers.
Monetary Policy Committee member Ben Broadbent said the record-breaking recession that the UK is thought to be entering could be longer or shorter than the Bank predicted earlier this month.
The Bank has forecast that the country could already be at the start of an eight-quarter recession, the longest since reliable records began in the 1920s.
“The last two or three quarters of that projected decline in GDP (gross domestic product) are pretty small, so it wouldn’t take much of a tilt to shave a couple of quarters off the projected length of the recession,” Broadbent said.
Bailey also told MPs he will not take a pay rise this year if offered one.
The BoE's governor, who has an annual pay package of about £575,000, told the Treasury Committee: “It’s not for me to decide but if I was offered one I would not accept it. I would politely decline as I have done before.”
He added that the Bank has not decided its latest pay changes for employees but indicated it would direct more support towards its lower-paid staff.
“We have not done our pay round yet,” he said. “But the mix of pay in settlements will be different.
The Bank of England has a target of keeping inflation to 2%.
Watch: How does inflation affect interest rates?