A senior Bank of England policymaker has suggested that achieving victory in the battle against inflation will necessitate British workers accepting lower pay deals and companies exercising restraint in their profits.
Sarah Breeden, one of the central bank’s four deputy governors, emphasised that there is still a considerable distance to cover before inflation returns to the government's 2% target, which the Bank aims to achieve on a sustainable basis. Speaking nearly a week after the decision to maintain interest rates at their highest levels since the 2008 financial crisis, Breeden noted that inflation in the service sector remains elevated, posing a challenge to the Bank's target. She indicated that a combination of moderation in wage pressures and tighter profit margins among firms would be necessary for service sector inflation to normalise.
The Bank has reiterated the need for further evidence of inflation decline and stability before considering its first interest rate cut since the onset of the Covid pandemic. Despite inflation easing to 4% in December from over 10% a year earlier, most economists anticipate a drop below 2% in the coming months, driven by decreasing global energy prices. Financial markets foresee potential interest rate cuts of up to one percentage point this year, from the current 5.25%, as inflation falls and economic growth stagnates.
However, policymakers remain cautious, expressing concerns about underlying inflationary pressures from the domestic economy, which could push inflation closer to 3% by year-end.