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UK cost of living crisis to last two years, says Bank of England’s Bailey

Governor of the Bank of England Andrew Bailey speaks during a news conference at Bank of England in London, Britain February 3, 2022. Dan Kitwood/Pool via REUTERS
Governor of the Bank of England Andrew Bailey is calling on workers and bosses to show 'restraint' on wage rises. Photo: Dan Kitwood/Pool via Reuters

The rising cost of living is going to carry on into 2023, the head of the Bank of England has warned.

Millions of households are also set to pay an extra £693 a year on energy bills from April.

Governor Andrew Bailey told the BBC that he does not expect the cost of living crisis to ease until next year, adding that UK households are in for a “difficult period”.

“It is going to be a difficult period ahead, I readily admit, because we are already seeing, and we're going to see, a reduction in real income.

“We're going to start coming out of it in 2023, and two years from now, we expect inflation back to a more stable position.

Read more: Bank of England increases interest rates to 0.5% amid rising inflation

Inflation, the rate at which prices are rising, is expected to peak at 7.25% in April, more than three times its target of 2%, and average close to 6% in 2022.

“This is a world of an external prices rising, reducing people's real incomes,” he added.

It comes after the Bank said that it expected prices to climb faster than pay.

Bailey also suggested workers should not ask for big pay rises to cope with the rising cost of living, so that prices did not increase out of control.

He said such a move by workers would be “painful” amid rising prices.

Read more: Energy price cap: who will be hit hardest?

“In the sense of saying, we do need to see a moderation of wage rises, now that’s painful. I don’t want to sugar that in any sense, it is painful, but we need to see that in order to get through this problem more quickly,’ Bailey said.

When asked if he wanted workers to refrain from asking for “big” pay rises, Bailey said: “Broadly, yes.”

Bailey was paid a total of £575,538 in the 2020-2021 financial year.

UK households are facing a record increase to their energy bills.
UK households are facing a record increase to their energy bills.

The Bank of England hiked interest rates for the second time in two months, from 0.25% to 0.5% and warned households faced the worst squeeze on disposable incomes for 30 years.

Real income is predicted to fall by five times the amount it did during the financial crisis of 2008, according to the projections by the monetary policy committee, which makes decisions on interest rates.

In its latest forecasts, the BoE predicted that real post-tax labour income will shrink by 2% this year, and another 0.5% in 2023.

Read more: UK energy price cap to rise 54% to £1,971

This means workers will face the biggest hit to their take-home pay since 1990, when comparable records began.

Confronted in a news conference with the fact that the rate hike will add to the squeeze of households, Bailey said: “It is a hard message but if we don’t take this action, it will be worse.”

Spiralling costs and tax hikes will hit every household: the energy price cap will rise by £693 to £1,971 per year amid soaring oil and gas prices, National Insurance is set to increase by 1.25 percentage points and petrol prices are up by more than a quarter in a year.

Record high inflation also means families are spending more on food, clothing, and footwear.

Energy bills forecast to rise even further next winter.
Energy bills forecast to rise even further next winter.

The rate hike will also hit millions of homeowners, with online mortgage broker Trussle calculating that the annual cost of the average new mortgage has risen by £650 in less than two months.

Council tax is also expected to go up, with the Institute of Fiscal Studies predicting many are likely to push up rates by close to the maximum that the government allows.

Bus and train fares are already 5.9% higher.

To mitigate the pain, chancellor Rishi Sunak unveiled a £9bn package support for households with a £200 rebate on energy bills for all households coming in the autumn, but repaid over the following five years.

Those with properties in council tax bands A to D would also have a £150 reduction in their bills this year. The chancellor said this was a “fair, targeted and proportionate” package of support.

Watch: What is inflation and why is it important?