Shortages of workers in the UK could fuel further interest rate hikes, warned Bank of England chief economist Huw Pill.
With the base rate currently set at 3%, following a succession of rate raises since last December and the biggest single hike since 1989 earlier this month, Pill suggested declining economic activity among working age people may mean future rises are required.
While giving a lecture on the bank’s monetary policies to the Institute of Directors in London, he suggested recruitment difficulties have seen higher wages being given to attract workers, partially fuelling the UK’s high inflation rate alongside rising fuel prices.
“Behind the labour market tightness lies a decline in participation rates among the working age population, particularly those in the 50-65 age group,” he said.
“The reasons behind this decline remain the subject of controversy, but the impact of the pandemic on early retirement and long-term health, as well as underlying demographic developments, all seem to have played a role.”
Calls have previously been made for the government to relax immigration rules so that job vacancies, which numbered roughly 1.25mln at the end of September, can be filled.
At the Confederation of British Industry conference earlier this week, director general Tony Danker called for “economic migration” to be allowed more freely in areas facing worker shortages, saying “we don't have enough Brits to go round”.
Next PLC (LSE:NXT) boss, Simon Wolfson was also among those also calling for more overseas workers to be let in, criticising the government for not letting people in who are “queueing up to come to this country to pick crops that are rotting in fields, to work in warehouses that otherwise wouldn’t be operable”.
Wolfson, who had been in favour of Brexit, said the current arrangement was “not the Brexit I wanted”.
Pill added: “Just like the rise in gas prices, rising inactivity among the working age population represents an adverse supply shock.”
“Monetary policy cannot be put on an autopilot. Any plan has to be conditional on economic conditions,” referencing current inflation, which topped 11% at last count.