British businesses are cutting costs, reducing headcount and absorbing higher energy bills in their profit margins rather than passing them on to customers, Andrew Bailey, the governor of the Bank of England, said today.
Speaking in Bangkok on the sidelines of the International Monetary Fund’s annual meetings, Bailey said firms surveyed regularly by the Bank were taking steps including cutting staff numbers and holding back on raising prices.
“When I go around the country … talking to businesses, there is a very big focus on cost-cutting and a very big focus on the difficulty of passing through [price rises],” he told the audience.
“Firms are clearly squeezing margins as well as cost-cutting,” Bailey said. He added that “the longer the energy situation goes on”, the more likely it was that companies would start to raise prices to protect their margins.
Bailey said evidence that this year’s rise in inflation, driven by higher oil and gas prices, was spreading into prices across the wider economy remained “subdued”.
Consumer price inflation stands at 3.1 per cent against the Bank’s 2 per cent target, according to the Bank of England. Figures for September are due next week.
The Bank’s nine-member monetary policy committee meets early next month to decide whether to raise interest rates for the first time in three years. Its next decision is scheduled for 5 November, according to the Bank, which has held Bank Rate at 3.75 per cent at every meeting this year.
The committee has been split. A minority of three members has voted to raise the base rate to 4 per cent, while the majority has preferred to wait and see whether wages and the prices of other goods and services are affected by the US-Iran war.
This week Huw Pill, the Bank’s chief economist, and Megan Greene, an external member of the committee, have signalled that they are likely to keep voting for a rate rise to guard against the risk of an inflationary surge.
Although the Bank has left rates unchanged this year, a sell-off in UK government bonds has pushed up borrowing costs for companies and mortgage holders. The 10-year gilt yield has reached its highest level since 2007, and Bailey said UK mortgage costs were now the highest among the G7 advanced economies.
Traders are betting that the Bank will raise the base rate at its November meeting and that it will need to make three further quarter-point increases over the following 12 months.
Bets on rate rises have grown since official figures published yesterday showed the economy continuing to expand. The Office for National Statistics said monthly GDP grew by 0.1 per cent in August, against forecasts of a 0.1 per cent fall, and that output rose by 0.7 per cent in the three months to August.
Bailey attributed that resilience to stronger “household finances” and corporate balance sheets, as well as evidence of investment in artificial intelligence and related technology.
The governor’s comments follow earlier Bank of England survey data, published in April, which showed firms expecting higher inflation and fewer rate cuts after energy prices rose following the outbreak of the Iran conflict. At that time, companies told the Bank they expected to raise their own prices by an average of 3.7 per cent over the following year.
Bailey said today that the businesses he speaks to are, for now, focused on cutting costs and finding it difficult to pass on price rises. He warned that the likelihood of companies raising prices to protect their margins increases the longer the energy situation continues.
