© Reuters. FILE PHOTO: Pedestrians walk past the Bank of England in London on March 5, 2015. REUTERS/Suzanne Plunkett
William Schomberg and David Milliken
LONDON (Reuters) – Britons and businesses need to realise they are unlikely to recover income lost to high inflation anytime soon, the Bank of England’s chief economist said on Friday in the central bank’s latest warning of tough times ahead.
A day after the Bank of England forecast inflation to exceed 10% later this year, leading to a sharp economic slowdown – and possibly a recession – Huw Pill said the central bank could not insulate people from soaring energy and commodity prices .
“What we’re buying has become more expensive relative to what we’re selling,” Peel told an online briefing for businesses hosted by the Bank of England.
“It does mean some kind of squeeze…on the real spending power of the UK domestic population. How this is distributed among companies, wage earners, pensioners etc, there isn’t much to say about monetary policy that.”
On Thursday, the Bank of England raised its benchmark interest rate to 1.0%, the highest level since 2009, and said the economy would be flat in 2023 and 2024 as inflation soars this year.
After that, Peel said, the BoE’s forecast for Britain’s medium-term economic potential was weak by historical standards.
“Perhaps the benchmark shouldn’t be a quick return to inflationary growth in wage growth, because at some point some parts of society need to accept that this real income squeeze is happening.”
Companies may also absorb some of the shock through smaller profit margins, Peel said.
“To be clear, the squeeze in real income over the next 18 months is a very big squeeze, reflecting a huge shock to the economy.”
Earlier this year, Bank of England Governor Andrew Bailey called for a cap on pay agreements to avoid fueling a rise in inflation, sparking an angry response from unions.
On Thursday, Bailey said those who were able to maintain their income levels could come at the expense of those with the least bargaining power in society.
The combination of high inflation and weak growth poses the conundrum for the Bank of England as to how many more rate hikes are needed after four hikes since December, the fastest pace of monetary tightening in 25 years.
Peel was one of six MPC members who voted for a 25-percentage-point rate hike on Thursday, while three other members voted for a double rate hike.
“We should be looking at the medium term in what we’re trying to do, rather than overreacting to short-term developments… (and) have a smoother, more durable, firmer and more purposeful policy method,” Peel said.