Andrew Bailey and Jeremy Hunt join forces to demand UK wage restraint

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Bank of England governor Andrew Bailey and chancellor Jeremy Hunt joined forces on Monday to call for wage restraint, as they told a City of London audience that high pay settlements were hitting the fight against inflation.

Bailey said at the annual Mansion House dinner that the “unexpected resilience” of Britain’s economy had exacerbated wage and demand pressures, contributing to “sticky” high inflation.

Meanwhile, Hunt said he and Bailey would do “what is necessary for as long as necessary to tackle inflation” and return it to the central bank’s 2 per cent target.

The chancellor told the Mansion House audience: “That means taking responsible decisions on public finances, including public sector pay, because more borrowing is itself inflationary.”

Rishi Sunak, the prime minister, and Hunt must decide this month whether to back pay rises of about 6 per cent for public sector workers — the average expected to be recommended by independent review bodies for 2023-24.

Hunt told the Financial Times last week that any such pay awards could not be funded by more government borrowing, suggesting savings would have to be found from existing Whitehall budgets.

“We will not resolve these public sector pay disputes with any measures that are inflationary,” he said.

Bailey told City figures that the UK economy had shown unexpected resilience in the face of inflationary shocks unleashed by the Covid pandemic and Russia’s invasion of Ukraine, noting that the unemployment rate stands at 3.8 per cent.

He went on to say that nobody wanted “to see unemployment higher or growth weaker” but added: “Both price and wage increases at current levels are not consistent with the inflation target.”

Consumer price inflation currently stands at 8.7 per cent. Annual private sector wage growth increased to 7.6 per cent in the three months to April, according to the latest official data.

Financial markets expect the BoE to continue to raise interest rates beyond the current level of 5 per cent.

Bailey said he expects UK headline inflation to “fall markedly over the rest of the year” due to lower energy prices. “Food prices should fall, too, as lower commodity prices feed through to prices in the shops,” he added.

The chancellor’s tough line on inflation was intended to address short-term problems facing the economy, but he also set out a series of “Mansion House reforms” to try to improve long-term growth.

These include changes to regulations with a view to persuading pension funds to put more of their money into “productive assets”, notably early-stage companies.

Hunt hailed a voluntary compact by leading companies to put 5 per cent of their assets from defined contribution pension schemes into unlisted businesses — potentially unlocking up to £50bn of investment for high-growth companies by 2030.

Hunt said he was prepared to require smaller pension funds to merge, to improve their efficiency and help them invest in assets which would yield a higher return for savers.

He also outlined proposals to overhaul stock market listing rules to try and make the City a more attractive venue, and the package of reforms received a generally favourable welcome.

But Matthew Beesley, chief executive of Jupiter Asset Management, sounded a note of caution, saying: “As active managers our job is to funnel capital to parts of the market that we believe are inefficiently priced — at times that will include growth assets and private assets, and at times it might not.”

Beesley said a lack of growth capital in the UK was not the only issue. “The bigger issue is the lack of stability in the UK over the last 10 years. The fear of what was unknown prior to Brexit . . . and even now, because we’re in an interregnum between governments, those that have been cautious in wanting to commit capital to the UK might possibly stay cautious for the next year or so.”

The Treasury’s statement that more “effective investments” by defined contribution schemes will increase savers’ pension pots “by up to 12 per cent, or as much as £16,000 for an average earner” was also queried. 

“It is unwise, to put it mildly, for the government to use past performance data in a press statement to justify these reforms which could actually reduce value for savers,” said Mick McAteer, co-director of the Financial Inclusion Centre think-tank and a former board member of the Financial Conduct Authority, the UK regulator.