Pay rises ‘good news’ says No 10 after Bailey warns wages too high

‘Those numbers are high by any level consistent with sustained meeting of the inflation target’

DOWNING STREET has insisted that pay rises are “obviously good news” after the Bank of England Governor renewed his call for wage restraint.

No10 said it was “important” that pay was rising faster than prices, even as Andrew Bailey warned wage growth remained too high for inflation to come down sustainably to its 2pc target.

The Bank opened the door to interest rate cuts this summer and said keeping borrowing costs at current levels risked pushing the economy into a prolonged recession. Threadneedle Street predicted inflation would halve to 2pc within months as Mr Bailey signalled the end of a cost of living squeeze. The Governor hailed the recent drop in inflation as “good news” as the Monetary Policy Committee (MPC) kept rates on hold at 5.25pc and signalled the next move in interest rates would be down.

He also hinted that the first rate cuts could come this summer.

Speaking to CNBC, Mr Bailey said: “I’m not going to give a view on how many cuts there’ll be and when they will be. But I think that view that the market is taking is not one I object to.”

Investors believe the Bank will begin cutting rates in June. Mr Bailey said the question of whether people should still exercise pay restraint was “important”.

While inflation has fallen from highs of 11.1pc in October 2022 to 4pc in December, he warned that services inflation, which stands at 6.4pc, remains persistent. He said services inflation “does have a big share of labour costs in it”.

Mr Bailey said he was not trying to “preach” to workers following controversy last year after he suggested people should not ask for pay rises, to help bring down inflation.

However, he added: “Those numbers are still high by historical standards and high by any level consistent with sustained meeting of the inflation target.”

No10 said the Governor and Bank “have their own lens” but the Government thinks wages rising faster than inflation is “obviously good news”. Asked if wage growth is good, No10 responded: “Of course ... It’s really important that wages are growing and living standards are growing.”

Mr Bailey noted that inflation was likely to rise again in the second half of 2024, adding that policymakers wanted “more evidence” that prices were no longer at risk of spiralling out of control before lowering borrowing costs. He added: “We have come a long way. That is good news. But we are not there yet.”

The Bank’s latest economic forecasts also showed that the longer interest rates were kept on hold, the more damage it would inflict on the economy.

One scenario, where rates are kept at 5.25pc for three years instead of falling to 3.2pc in 2026 as markets expect, would leave the economy at risk of a two-year recession, the Bank said.

Concerns about the impact of higher rates on households and businesses have led to growing calls for the Bank to start cutting rates. Around 2.3m households are expected to renew their mortgages this year at higher interest rates this year, according to the Bank. MPC member Swati Dhingra, who has repeatedly voted for rates to be held, called for an immediate cut to 5pc.

In the first vote to ease policy since the height of lockdown in 2020, Ms Dhingra said there were already signs that the economy was “less resilient” than previously thought.

Policymakers noted that wage growth remained elevated, and suggested that bets on rate cuts this year to 4.25pc were too aggressive and would not keep a lid on inflation. Pay deals are expected to average 5.4pc this year, according to a Bank survey, with the jobs market expected to remain “tight”.