Bank of England governor Andrew Bailey has admitted the wage and price spiral unleashed by inflation could take longer to bottle up than it did to emerge.
The Bank has been hiking interest rates sharply in a battle to tackle inflation, which has remained in double-digits.
It predicts it will come down over coming months – though forecasts last week suggested it will still be above 5 per cent by the end of 2023.
But Bailey said in a speech to the British Chambers of Commerce there was still a significant risk that it could remain high.
Cautious: Bank of England governor Andrew Bailey (pictured) said in a speech to the British Chambers of Commerce that there was still a significant risk that inflation could remain high
The Bank is worried about so-called ‘second round’ effects. These occur when the initial costs spike, caused by an external shock such as the Ukraine war, sparks a pattern of businesses putting up prices and workers demanding higher wages.
Bailey warned: ‘We think the unwinding of second-round effects may take longer than it did for them to emerge.’
But he reiterated the Bank’s slightly more optimistic outlook for economic growth, with a recession no longer predicted. It comes a day after the latest jobs data, closely watched by the Bank, showed a rise in vacancies and a fall in employees.
Bailey said there were signs of the labour market ‘loosening a little’ and that pay growth could ease further later this year – something that would point to an easing of inflation pressures.
But he added that the easing was happening more slowly than had been expected in February.
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