Friday, September 20, 2024

Public sector pay deals risk keeping ‘mortgage costs higher for longer’

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Junior doctors were given a 22pc pay rise, while train drivers have received almost 15pc.

Despite the inflation-beating increases, junior doctors have raised the prospect of more strikes if they do not get further increases.

Unions are also preparing to push the Government for “pay restoration” to make up for what they claim is more than a decade of below-inflation wage rises.

Inflation has already been “stickier” in Britain than in the US and eurozone, Ms Mann said, raising the possibility that interest rates will have to stay higher in the UK than in the other economies. That would prolong mortgage misery for millions of homeowners who have been moved on to higher rate deals in recent years and have been hoping for falls in borrowing costs.

Ms Mann said: “Services price inflation has proven to be much stickier and in particular has been higher on average than in the other two regions. Hence there would appear to be more upside risks to overall inflation in the UK context.”

So far the European Central Bank has cut its deposit from 4pc to 3.5pc, while the US Federal Reserve this week cut its federal funds rate from 5.5pc to 5pc and signalled more large cuts are likely before the end of the year.

Ms Mann said: “Structural behaviours in UK labour and product markets appear to have systematically embedded inflation. Policy therefore needs to remain restrictive for longer to purge these behaviours.”

Ms Mann is what is known as a “hawk” on the MPC, putting more emphasis on risks to inflation than risks to economic growth and jobs in her decision-making.

The policymaker voted against the Bank of England’s decision to cut the base rate for the first time in four years last month, taking it from 5.25pc to 5pc. This week she voted with the majority of the MPC’s nine members to stay on hold at 5pc.

Speaking on Friday, Ms Mann argued it was better to keep interest rates higher for longer to ensure inflation is crushed before cutting rates “aggressively” when appropriate.

Ms Mann said British living standards appear to have been hit far harder than those in the US and even the eurozone by Covid and the energy crisis, and that this may now be a permanent shift in the economy.

“In the UK, it looks like the combination of shocks has thrown real consumption perhaps permanently off its pre-Covid trend. This is not the case for the US or the euro area, despite a similar confluence of shocks for the latter economy,” she said.

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