Bank of England Governor Bailey on Thursday said that, after adjusting for Covid, underlying wage growth is higher than we would expect for this stage of the economic cycle. We are seeing upwards upward movement in what firms expect wage settlements to be, he noted, though did say that he would not be using the phrase "wage-price spiral" as we are not in that territory. 

Bailey said that this is a hard message, but we are facing a squeeze on real incomes in the UK this year, and that if the BoE doesn't raise the bank rate, the squeeze will be worse. Households are facing a lot of pressure, he added, including on those who are less able to afford it. Government measures will help households, he noted. 

Bailey reiterated that the BoE needs to focus on its inflation objective, before adding that the impact of rate increases on inflation expectations is important for its impact on wage bargaining. The big underlying driver of the hit to living standards in the UK is not something monetary policy can do anything about, he noted, adding that the high price of globally traded goods has persisted for longer than we expected. We are seeing evidence that supply chain difficulties are easing, Bailey continued, but we still need to see a lot more. 

Market Reaction

Sterling does not appear to have reacted too forcefully to the latest comments from Bailey, with GBP/USD having ebbed back to trade at pre-BoE policy announcement levels in the 1.3570s area in recent trade.