The governor of the Bank of England has said there are signs that labour market tightness is loosening – but warned interest rates could still be increased further to curb inflation.
Andrew Bailey made the comments as he described the UK’s outlook as “looking a bit brighter” due to falling energy prices and “greater resilience in the economy than expected” during a speech to the British Chambers of Commerce’s annual conference on Wednesday.
The governor told delegates: “There are signs that the labour market is loosening a little.
“There has been some recovery in labour market participation, especially amongst younger workers, and the number of vacancies has come down from very high levels.
“The ratio of the number of vacancies to the number of unemployed, a key measure of labour market tightness, has fallen as a result.”
It comes after data from the Office for National Statistics (ONS) on Tuesday revealed the unemployment rate increased to 3.9% in March, up from 3.8% in February and higher than expected.
The figures have raised expectations that interest rate rises, including a record-breaking 12th successive increase to 4.5% earlier this month, could be paused as wage growth slows.
The Bank believes that labour market tightness – in which there is an imbalance between supply and demand for workers, helping to push up wages – is a factor driving inflation, which currently stands at 10.1%.
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Commitment to inflation target ‘unwavering’
However Mr Bailey cautioned: “the easing of labour market tightness is happening at a slower pace than we expected in February, and the labour market remains very tight.”
He also said the Bank was closely monitoring all indicators of rising costs across the economy and warned it would not hesitate to increase rates again if necessary – but said there were “good reasons” to expect inflation to fall sharply in the coming months as energy prices fall.
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The governor added: “I can assure you that the Monetary Policy Committee will adjust bank rate as necessary to return inflation to target sustainably in the medium term, in line with its remit.
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“If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required. Our commitment to the 2% inflation target is unwavering.”
It comes amid scrutiny of the Bank’s interest rate rises. Some critics, including professor Danny Blanchflower, a former member of the Bank’s monetary policy committee, have called on the Bank to change course.
Professor Blanchflower told Sky News earlier this month that he believed the Bank’s strategy was one of “utter, complete incompetence” and urged it to cut rates as soon as possible.
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