The Bank of England has warned households that living standards will fall this year as the effect of the Brexit vote works its way through to higher prices and meagre pay deals.
Presenting a sober assessment of the economic outlook just weeks before the general election on 8 June, the Bank’s governor Mark Carney predicted living standards could start to recover in 2018 but , in the meantime, inflation would be higher than pay growth this year making it a “more challenging time” for households.
He said inflation, already at its highest for more than three years, was expected to continue rising in 2017 as the pound’s weakness since the Brexit vote raised import costs. As the UK embarks on talks to leave the EU, he also highlighted the uncertainty weighing on businesses as they hesitate over awarding pay rises.
“Uncertainty for companies about the outlook may also have made them unwilling to raise wages at a faster pace until they have more clarity about future costs and market access,” Carney said at a news conference to present the Bank’s quarterly inflation report.
Against the backdrop of political uncertainty, slowing economic growth and rising inflation, the Bank left interest rates on hold at their record low of 0.25%. But it hinted that they may need to rise sooner than investors were anticipating if inflation continued to overshoot its target and as long as the Brexit process was “smooth”.
The monetary policy committee was split for its second meeting running over the rates decision, with Kristin Forbes again voting against the other seven members and calling for an immediate rise to 0.5% to keep rising inflation in check. One seat on the committee was empty – the result of resignation by the Bank’s deputy governor, Charlotte Hogg, when it emerged she had breached the Bank’s code of conduct.