Bank of England governor Andrew Bailey warned on Friday against workers trying to “beat inflation” by seeking hefty pay rises that he said would prolong the dramatic rise in prices.
Amid a drumbeat of strikes and discontent from some MPs at the Bank's failure to prevent runaway inflation, Mr Bailey said raising wages as demanded by unions would only make the problem worse.
Speaking to BBC Radio 4's Today programme, he said non-unionised workers without the bargaining muscle to demand higher pay would be worst affected if inflation gets out of control.
He defended the Bank's policies a day after interest rates were increased to 1.75 per cent and inflation was predicted to rise to 13 per cent this year, the highest level in decades.
A recession is expected this year and real incomes are projected to “fall sharply” in 2022 and 2023.
Although Mr Bailey said inflation was mainly being driven by external shocks, especially the energy crisis unleashed by Russia's invasion of Ukraine, he said increasing interest rates to slow the rise in prices would stop inflation becoming unshakeable.
“We don’t know what Vladimir Putin will do next. We’re seeing he’s severely restricting the supply of gas to Europe and that is having a huge effect. The risk is that the inflation becomes embedded and it doesn’t come down,” he said.
“If everybody tries to beat inflation, and that’s in both price setting and wage setting, it doesn’t come down, it gets worse. In that world, it’s the people who are least well off who are worst affected because they don’t have the bargaining power.”
The economic strife is playing out against the backdrop of the Conservative leadership election, which will decide who becomes prime minister as Britain heads into a difficult winter.
The problems are exacerbated by high food prices and labour shortages resulting from the coronavirus pandemic, in which some industries laid off workers only to now find themselves short.
Some Conservative MPs have lashed out at the Bank of England for acting too late, as they see it, to prevent high inflation that has been on the cards for months.
“The Bank of England have been asleep at the wheel,” said Tory MP Andrew Bridgen.
Suella Braverman, the attorney general and a prominent supporter of leadership candidate Liz Truss, said a Truss government would review the Bank's mandate and independence on interest rates.
She told Sky News there was no suggestion of completely revoking the Bank's autonomy, which was granted under a Labour government in 1997, but that “there are many other models around the world where central banks have different degrees of independence”.
Conservative leadership race — in pictures
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Candidates Rishi Sunak and Liz Truss at the Conservative Party leadership election hustings at Wembley Arena, London. This was the final hustings attended by Tory Party members who will vote for the new leader and next prime minister. EPA -
Liz Truss addresses Conservative Party members at Wembley Arena. AP -
Mr Sunak puts forward his case to be leader while speaking at Wembley Arena. Bloomberg -
Mr Sunak visits his family's old business, Bassett Pharmacy in Southampton, while on the campaign trail. Reuters -
Ms Truss speaks to staff at Condimentum Ltd at the Food Enterprise Park in Norwich. Getty Images -
A Rishi Sunak supporter at a hustings event in Norfolk. PA -
Mr Sunak greets people at a leadership hustings in Manchester. Bloomberg -
Ms Truss poses for a selfie with a supporter as she arrives for the event in Manchester. Getty -
Rishi Sunak looks through the sights of an anti-tank missile launcher, supplied to Ukraine, during a visit to the Thales Defence System plant in Belfast, Northern Ireland. AP -
Liz Truss at a Conservative Party leadership campaign event in Belfast. Getty -
Liz Truss meets supporters before a hustings in Perth, Scotland. Getty -
Rishi Sunak speaks during a campaign visit to Cluny Castle in Inverurie, Scotland. Getty -
Police hold back protesters outside Perth Concert Hall, Scotland, where Conservative leadership candidates Liz Truss and Rishi Sunak were speaking. PA -
A mural showing the two leadership contestants appears on a wall in Belfast, Northern Ireland. AP -
Rishi Sunak during a visit to St John's Wood Synagogue, north London. PA -
Liz Truss at the Conservative Party leadership election hustings in Cheltenham. EPA -
Rishi Sunak during a hustings event in Cheltenham. Reuters -
Liz Truss speaks to scientists during a campaign visit to a life sciences laboratory at Alderley Park in Manchester. PA -
Rishi Sunak during a campaign hustings in Darlington, England. Bloomberg -
Liz Truss meets party members before she speaks at the Darlington campaign hustings. Getty -
Rishi Sunak arrives for the Darlington hustings. Getty -
Liz Truss plays pool during a visit to the Onside Future Youth Zone in London. Reuters -
Rishi Sunak looks at a book with Teddy Openshaw, 4, as his father, Henry, looks on after a Conservative leadership campaign event in Ribble Valley, Lancashire, England. Getty -
Liz Truss plays table tennis with former Conservative party leader Iain Duncan Smith during a visit to the Onside Future Youth Zone in London. Reuters -
Liz Truss with supporters at a campaign event in Solihull, England. Reuters -
Rishi Sunak attends a campaign event held by his party in Bexhill, England. Reuters -
A protester is removed as Ms Truss speaks during the Conservative Party leadership hustings in Eastbourne. Bloomberg -
Mr Sunak speaks at an event in Edinburgh. PA -
Ms Truss leaves the hall in Exeter, south-west England, after her speech to a Conservative Party membership hustings. Getty -
Mr Sunak speaks at the University of Exeter in south-west England. AP -
A supporter of Ms Truss at a Conservative Party hustings in Exeter, south-west England. Getty -
Ms Truss at a hustings event at the Pavilion conference centre at Elland Road in Leeds. PA -
Mr Sunak in Salisbury watching a screening of the Uefa Women's Euro 2022 final between England and Germany at Wembley stadium. England won 2-1 in extra time. PA -
Ms Truss before the Uefa Women's Euro 2022 final at Wembley stadium in London. AFP -
Mr Sunak meets Tory members at Fontwell Park Racecourse. Reuters -
Ms Truss at an event in Dereham, Norfolk. AFP -
Mr Sunak in Ropley, near Winchester, Hampshire. PA -
Ms Truss speaks as Conservative Member of Parliament Tom Tugendhat looks on at a Conservative Party leadership campaign event at Biggin Hill Airport. Getty -
Ms Truss on the campaign trail in Woodford Green, on the outskirts of London. Reuters -
Mr Sunak at a Conservative Party hustings event in Leeds. AFP -
Ms Truss speaks at the hustings event in Leeds. AFP -
Sunak and Truss-themed souvenirs at a stand during the Leeds hustings event. Reuters -
Ms Truss, and her mother, Patricia, arrive for the hustings event. Getty -
Ms Truss poses with supporters in Morley, England. Getty -
Mr Sunak delivers a speech during a campaign event in Newmarket. AFP -
Ms Truss and Jake Berry, MP for Rossendale and Darwen, during a visit to a broadband interchange company in Leeds. PA -
Mr Sunak answers questions as he takes part in the hustings in Leeds. AFP -
Ms Truss speaks at an event at a private house with members of the Conservative Party in Woodford Green. PA -
Ms Truss and Mr Sunak pose for a picture before a BBC leadership debate at Victoria Hall in Hanley. Getty -
Ms Truss addresses Mr Sunak during the televised debate. Getty -
Mr Sunak, with daughters Krishna and Anushka, and wife Akshata Murthy, during a visit to Vaculug tyre specialists at Gonerby Hill Foot, Grantham. PA -
Ms Truss speaks to people while campaigning in Marden. Getty -
Ms Truss celebrates after being named, along with Mr Sunak, one of the final two candidates in the race to become the UK's next prime minister. PA -
Mr Sunak outside his campaign office in central London. EPA -
Ms Truss outside Downing Street in London. Reuters -
Rishi Sunak meets Conservative Party members and activists, in Teesport, Redcar. Reuters -
Conservative leadership candidates Mr Sunak, Ms Truss, Kemi Badenoch, presenter Julie Etchingham, Tom Tugendhat and Penny Mordaunt during 'Britain's Next Prime Minister: The ITV Debate' in London. EPA -
Ms Badenoch arrives at Here East studios in Stratford, east London, before a live television debate. PA -
Mr Sunak arrives at a London event to launch his campaign to be the next Conservative Party leader and UK prime minister. Reuters -
Mr Tugendhat appears on the BBC One current affairs programme, 'Sunday Morning'. PA -
Ms Badenoch, Ms Mordaunt, Mr Sunak, Ms Truss and Mr Tugendhat before the live television debate. PA -
Ms Mordaunt arrives for the launch of her Conservative leadership campaign at the Cinnamon Club in Westminster. PA -
Ms Truss speaks at the launch event for her campaign to become the next leader of the Tory Party and Britain's prime minister, in London. EPA -
Chancellor of the Exchequer Nadhim Zahawi, one of the candidates who has been knocked out of the race, giving a speech at the Churchill War Rooms. PA -
Former leadership candidate Jeremy Hunt appearing on the BBC One current affairs programme, 'Sunday Morning'. PA -
Sajid Javid attending the launch of his campaign to be Conservative Party leader and prime minister, at the Cinnamon Club in London. He has since been knocked out of the contest. PA -
Rehman Chishti is interviewed after announcing his bid to become the next prime minister. Mr Chishti is no longer in the race. Getty -
Mr Tugendhat speaking at the launch of his campaign. PA -
Culture Secretary Nadine Dorries and Conservative MP Iain Duncan Smith arrive for the Truss campaign launch event. Getty -
Former leadership candidate Attorney General Suella Braverman at the Churchill War Rooms in central London. PA -
Supporters of Mr Sunak wait for his arrival ahead of the campaign launch. Bloomberg -
Mr Tugendhat makes a speech at the launch of his campaign. PA -
Mr Javid mops his brow while launching his campaign. Getty -
Ms Truss leaves for work after her announcement that she would be running for the leadership of the Conservative Party. Getty
Mr Bailey would not be drawn on the leadership contest but said he was willing to discuss the Bank's regime with whoever is elected prime minister.
However, he said the independence of the central bank was “critically important” and that he did not see any “large desire in this country” to call it into question.
Ms Truss, who is ahead of former chancellor Rishi Sunak in the Tory leadership polls, said she thought a recession was not inevitable as she pitched various pro-growth policies to members.
Former chancellor Mr Sunak said his opponent's “premature tax cuts” would only exacerbate inflation.
