Bank of England Chief Economist Huw Pill said the UK economy has proved “slightly stronger than expected” over the past month and wage growth stickier than thought.
Pill’s comments in slides prepared for a speech at the Institute of Directors suggest he may be concerned that stronger demand than projected in the BOE’s February forecast will keep inflation high.
That could point to more interest rate hikes as the BOE grapples with double digit inflation, which at 10.1% is more than five times its target. The bank has already raised rates from 0.1% to 4% since December 2021, and markets expect a further half-point rise or more by September.
“Survey indicators that have become available since the publication of the forecast have surprised to the upside, suggesting that the current momentum in economic activity may be slightly stronger than anticipated,” Pill said, according to the slides released by the BOE on Thursday.
“For instance, the latest data for private sector regular pay growth – which was published after the forecast was finalized – surprised slightly to the upside,” he said in the slides.
Pill also warned that companies feel emboldened to raise prices, both to recover costs and go further by boosting their profit margins. The scenario depicted in the slides spoke directly to the BOE’s main fear, which is that a wage price spiral takes hold.
“The strength of corporate pricing power and disrupted supply chains may support firms’ expectations that higher labor costs can be passed through to consumer prices, as well as offering opportunities to build margins,” Pill said, according to the slides.
The comments appeared to be more hawkish than those of governor Andrew Bailey on Wednesday, when he said that the economy was “evolving much as we expected it to” but added that activity and wages have been “slightly stronger.”
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--With assistance from Tom Rees and Lucy White.
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