The exodus of the UK workforce could force the BoE to raise rates, says chief economist | Interest rates

The increase in the number of people leaving the UK workforce due to ill health or early retirement could force the Bank of England to raise interest rates further, its chief economist warned.

Huw Pill said the departure of more than half a million workers from the labor market since the Covid pandemic threatened to fuel inflationary pressures long after the shock from skyrocketing energy prices is likely to have died down.

Speaking to business leaders in London, he suggested that the rise in economic inactivity – when working-age adults are neither in or looking for a job – could force a response from Threadneedle Street.

“Increasing inactivity among the working-age population represents an adverse supply shock, adding to the difficult short-term trade-offs facing monetary policy,” he said.

Pill said the workforce exodus could further push employers to offer higher wages amid near-record job openings and the lowest levels of unemployment since the 1970s. This, in turn, could fuel inflation as companies raise prices would increase to absorb higher labor costs.

“The labor market has become increasingly tight and turned out to be tighter than we expected, largely due to the unfavorable developments in participation that we had not fully anticipated,” he said.

The UK is lagging behind other advanced economies with employment still below pre-Covid levels. Official figures show that the number of people classified as economically inactive has risen by nearly 630,000, thanks to a record number of long-term illnesses and an increase in early retirements.

Economists including Andy Haldane, Pill’s predecessor, have warned Britain’s “missing” workforce is contributing to a weaker post-pandemic recovery in the UK than in other countries, as they question whether backlogs in the NHS and years of underinvestment in health care could play a role.

Despite sounding the alarm about continued high inflation, Pill said there were some signs that the job market was beginning to “spin” as the economy slides into recession, including a stabilization of job vacancies from historically high levels.

“That will weigh against domestic inflationary pressures and alleviate the threat of continued inflation,” he said.

He also said it was unlikely that interest rates would have to rise to the level priced in by financial markets before the central bank’s latest decision on borrowing costs – which implied interest rates would peak at around 5.25% by the end of next year .

The Bank raised interest rates by 0.75 percentage point to 3% earlier this month, despite forecasts that higher borrowing costs would push the economy into its longest recession since the 1930s.

However, Pill warned there was “more work to do” to raise interest rates to tackle inflation above 11% for the first time since 1981, with the aim of preventing high interest rates from becoming entrenched.

“Further measures are likely to be needed to ensure that inflation returns to the 2% target sustainably over the medium term,” he said.

Leave a Comment