Blog: UK’s international reputation damaged by mini-budget, says BoE governor; high inflation hits poorest hardest – as it happened – The Guardian

Bank governor says he’ll turn down any pay rise

Harriett Baldwin turns to the labour market:

Q: Isn’t it clear that we’re in a wage-price spiral now? There’s a lot of wage pressure out there, so how much will the Bank raise pay by?

Governor Andrew Bailey says the Bank hasn’t settled its pay offer to staff yet.

Total pay in the economy is rising by 6%, he says, but the Bank isn’t planning to raise pay that much.

He points out that many firms are turning to one-off payments, rather than permanent pay rises, and also directing their resources to lower-paid staff.

That, he says, will be part of the Bank’s approach, Bailey says:

We want to ensure our lower-paid staff get a larger share of the pay pot we are offering this year. That is the fair way to do it.

Q: Will you be taking a pay rise, governor?

Bailey says he won’t. If he’s offered one, he’ll “politely decline” as he did in previous years.

According to the Bank’s annual report, Bailey received a base salary of £495,000 for 2021-2022, plus a £99,000 payment in lieu of pension.

Given Bailey’s comments this year that workers should not seek large pay rises to avoid fuelling inflation, I think he’s wise to turn down any pay rise – it would trigger immense criticism….

Key events

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UK’s international reputation damaged by mini-budget turmoil, says Bailey

The UK’s international reputation has been damaged by the mini-budget introduced by Liz Truss and Kwasi Kwarteng, Andrew Bailey warns.

The BoE governor tells the Treasury committee that:

“We have damaged our reputation internationally, because of what happened”

Bailey points out that he was at the IMF annual meeting in Washington which took place shortly after the mini-budget (which Kwarteng returned early from, to be fired), so he knows the impact.

People were saying “we didn’t think the UK would do this”, Bailey says.

The governor adds that fixing this damage won’t be as easy as simply bringing government borrowing costs back into line (as the Bank achieved, though its pledge to buy long-dated bonds to rescue the pension system).

UK, US and eurozone long-dated bond yields Photograph: Bank of England

Bailey says:

It will take longer to rebuild that reputation than it will to correct the gilt curve.

We have to tread carefully.

Bank of England governor Andrew Bailey has told the Treasury committee he does not support the government’s plan to introduce controversial “call-in powers” allowing them to intervene in financial regulation.

I am concerned by it, Bailey tells MPs.

He points out that the UK system works with a well-established division of responsibilities.

Namely,… parliament legislates, the chancellor tells the Bank how it interprets its remit for price stability, regulators operate the regime, and MPs hold the regulators such as the Bank to account.

To be competitive, the UK needs an effective legal system and effective regulatory system, he explains, adding:

We must not threaten that.

Last week, the bosses of the UK’s City watchdog also voiced concerns, saying its independence and international reputation could be undermined if ministers could overrule decisions they didn’t like.

Andrew Bailey tells MPs that the Bank didn’t know what was in September’s mini-budget before it was announced.

And even if it had known, it would have been at a disadvantage as there was no analysis from the Office for Budget Responsibility.

On the housing market, Bailey says that indicators are showing a weakening in price growth and sales volumes.

The buy-to-let property sector has shrunk more than he expected, the governor adds.

He also suggests that the spike in mortgage rates, following the mini-budget, is now reversing as the UK ‘risk premium’ fades.

There are more mortgage offers coming on to the market, and we are beginning to see mortgage rates come down.

Q: Are we at peak inflation?

It will depend in part on what happens when the government’s energy price guarantee ends in April, the committee hears.

Andrw Bailey says that food is a key thing to watch – after food prices jumped by over 16% in the year to October.

UK ‘definitely underperforming’ on trade since Brexit

Q: Do you agree with Michael Saunders, a former MPC member, that without Brexit we wouldn’t face an austerity budget this week?

Andrew Bailey says the Bank thinks Brexit will cause a long-term downshift to UK productivity of around 3%. It calculated that shortly after the referendum, and hasn’t seen anything yet to change its view.

There is an effect from Brexit – but Michael must take his own view, Bailey adds.

“He’s a liberated man now,” points out Labour MP Rushanara Ali.

Bailey laughingly replies that “You said it” (perhaps remembering that he is not so liberated).

As a public official, Bailey says, he must remain neutral on Brexit, but not neutral when it comes to the effect of Brexit.

And he then slips the question to Swati Dhingra, the trade expert on the MPC, who tells MPs that UK trade has been underperforming since Brexit.

Dhingra tells the Treasury committee:

It’s undeniable now that we’re seeing much, much bigger slowdown in trade in the UK compared to the rest of the world.”

“There’s also the services exports side … there again, we’re seeing a really strong stagnation.

We’re definitely performing below trend in terms of the exports numbers, in terms of the imports [it’s] even probably a bit bigger than that.”

Dhingra explains that in the period after the referendum, the huge depreciation in the pound pushed up prices, and reduced wages.

And we are now seeing that UK is “definitely underperforming” on trade, both in terms of shipments to the EU, and to the rest of the world.

UK economy ‘dramatically lagging’ eurozone and US

Q: Is the UK’s economic outlook more troubling than for other countries, and if so why?

Andrew Bailey points the committee towards the UK’s performance since the pandemic began, which is “not a good story”,

The UK is still 0.7% smaller than at the end of 2019, the Bank of England governor says, while the euro area is 2.1% higher than its pre-pandemic levels, and the US economy is 4.2% bigger.

Q: What caused that dramatic difference?

Several factors, Bailey replies. The US, for example, has seen much more fiscal stimulus, and the UK labour force is tighter.

Deputy governor Ben Broadbent points out that the UK and Europe have suffered a much bigger blow from rising gas prices.

Catherine Mann puts her finger on another issue – the UK’s weak labour force participation, which is a “dramatic outlier” to other advanced economies.

This is a puzzle, she says – you’d expect higher wages to have brought people back into the jobs market. If not, how are they managing to cope with high inflation?

[One factor, though, is the huge rise in people unable to work due to ill health.

There are now 2.5 million people out of work due to long-term illness – partly due to long Covid, and also likely due to record long NHS waiting lists which have prevented people getting well enough to work.

Swati Dhingra adds that she opposed this month’s 75 basis-point rise in Bank rate, because it is clear that UK growth is already negative.

Dhingra is a trade economist, so understands that the terms of trade shock will make the UK poorer – through lower profits and lower wages, or through higher prices.

And if rates continue to rise, the UK risks a longer, deeper recession. So Dhingra voted for a smaller, 50 basis-point rise, due to the “risks of over-tightening”.

Another policymaker, Silvana Tenreyro, voted for just a quarter-point rise, but the other seven MPC members felt a three-quarter point rise was necessary.

Younger workers will also suffer long-term damage from the recession, warns Swati Dhingra, the newest member of the Monetary Policy committee.

Dhingra tells MPs that people who enter the labour market in a recessionary environment end up with “perpetually lower wages”.

In contrast, points out Catherine Mann, top earners don’t spend their full salaries so have a bank of savings to dip into to help them though the recessionary and inflationary shock.

Poor will suffer most in recession

Q: Who will suffer most from the recession?

Historically, recessions are regressive, points out deputy governor Ben Broadbent, which means poorer people will be worst hit by the downturn.

He tells the Treasury committee:

It is the less well-paid who are most likely to lose jobs in a downturn.

And of course, the huge rise in import prices are in areas which form a larger part of the consumption basket for less well off people – energy and food.

We saw evidence of that this morning – with the Office for National Statistics showing that poorer households are suffering the highest inflation rate (details here)

This morning’s producer price inflation data showed that imported food prices are up 30% year-on-year, Broadbent points out.

“What we buy from abroad costs a lot more. And that makes us poorer,” says MPC member Catherine Mann.

Monetary policy can’t offset that, she adds.

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