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Prime ministers

Tensions Rise Between UK Government and Bank of England Over Inflation and Growth

Strategic Insights

— 2 min read

As Prime Minister Rishi Sunak attempts to pitch Britain to investment heavyweights, the Bank of England Governor Andrew Bailey inadvertently stole the show, expressing his far more downbeat view on Britain's growth potential. Sunak's optimism was overshadowed by Bailey's comments, which questioned why the UK's dismal record of improving productivity shouldn't be highlighted. This growing tension between the two institutions comes as Sunak's government tries to drum up investment and improve the outlook, while the Bank of England battles to control inflation.

Key Takeaways:

  • The Bank of England Governor Andrew Bailey expressed his concern about Britain's growth potential, stating it's the worst he's seen in his lifetime, contradicting Prime Minister Rishi Sunak's optimistic picture of Britain.
  • Bailey's comments highlighted the UK's dismal record of improving productivity, questioning why this shouldn't be acknowledged given its poor state.
  • Tensions between the Bank of England and the government are growing, with the former prioritizing controlling inflation and the latter focusing on boosting growth ahead of the next election.
  • Deputy Governor Sir Dave Ramsden warned that price pressures are becoming more homegrown and will force interest rates to stay high for longer.
  • Jonathan Haskel warned that lackluster improvements in productivity and workers playing catch-up with wage increases risked pushing up inflation.
  • The government's efforts to boost growth are working in opposite directions to the central bank's mission to slow the economy and bring down inflation.
  • The Bank of England is keen to talk up interest rates staying high for longer and tamp down inflation-driving spending.
  • The government's Autumn Statement, which included tax cuts and a boost to the Living Wage, will only compound the Bank's inflation headache.
  • Economists warn that interest rates may even have to rise further, which would be a significant blow to the government's efforts to boost workers' incomes.
  • Shamik Dhar, BNY Mellon's chief economist, notes that the UK is uniquely vulnerable to further surprise rate increases and that taming wage pressures will be tougher than elsewhere.

Statistics:

  • Inflation has halved since the start of the year to 4.6%.
  • The economy has so far dodged a much-anticipated recession.
  • Wages have finally started outpacing price rises.
  • The Living Wage will rise from £10.42 to £11.44 an hour in April.
  • The government's four-point boost to the Tories' poll ratings after the Autumn Statement still leaves the party trailing 19 points behind Labour.
  • Inflation in the services sector is proving "much stickier" than hoped, with a 2% target for price rises across the economy.
  • Wage growth remains above 7%.
  • The Bank of England has repeatedly stated it's "too early" to talk of lower borrowing costs.

Sources:

  • Bloomberg TV
  • YouGov
  • Barclays
  • BNY Mellon
  • Threadneedle Street
  • The Autumn Statement
  • The Living Wage

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