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

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

The rise 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, the chief economist has warned.

Huw Pill said the departure of more than half a million workers from the labor market since the Covid pandemic risked adding to inflationary pressures, long after the shock from soaring energy prices is likely to subside.

Speaking to business leaders in London, he suggested that the rise in economic inactivity – when working-age adults are not in work or looking for one – could force a response from Threadneedle Street.

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

Pill said the workforce exodus could further pressure employers to offer higher wages, amid near-record vacancies and the lowest levels of unemployment since the 1970s. This in turn could increase inflation if companies pushed up prices to accommodate higher wage costs.

“The labor market has continued to tighten and has turned out to be tighter than we had expected, mainly due to the unfavorable development in participation that we did not fully anticipate,” he said.

The UK lags behind other advanced economies with employment still below pre-Covid pandemic levels. Official figures show that the number of people classified as economically inactive has increased by almost 630,000, driven by record high long-term sick leave and growth in early retirement.

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

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

“It will offset domestic inflationary pressures and ease the threat of inflation persistence,” he said.

He also said interest rates were unlikely to need to rise to levels priced in by financial markets before the central bank’s latest decision on borrowing costs – which had suggested rates peaked at around 5.25% late next year.

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

However, Pill warned there was “still more 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 sticking.

“Further action is likely to be needed to ensure that inflation will return sustainably to the 2% target over the medium term,” he said.

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