Bank of England's Bailey says wage rises must slow down

© Reuters. FILE PHOTO: Bank of England Governor Andrew Bailey poses for a photograph on the first day of his new role at the Central Bank in London, Britain March 16, 2020. Tolga Akmen/Pool via REUTERS

LONDON (Reuters) - Bank of England Governor Andrew Bailey said on Thursday that wages were rising too fast to get inflation under control, even if many households were facing a squeeze on their finances.

Asked by the BBC whether people should rein in their wage expectations, Bailey said: "In the sense of saying, we do need to see a moderation of wage rises, now that's painful.

"I don't want to in any sense sugar that, it is painful. But we need to see that in order to get through this problem more quickly."

Earlier on Thursday, the BoE raised interest rates for the second time in two months, taking Bank Rate to 0.5%. Nearly half its policymakers wanted a bigger increase to 0.75%.

The central bank said consumer price inflation - which was 5.4% in December - should peak at around 7.25% in April and post-tax income for working households would fall by 2% this year even as it trebled its forecast for wage growth this year to 3.75%.

The squeeze on living standards is turning into a political problem for Prime Minister Boris Johnson and finance minister Rishi Sunak who on Thursday announced measures to soften a hit to households from a jump of more than 50% in domestic energy tariffs starting in April, when taxes are also due to rise.

Before his BBC interview, Bailey told reporters that Britain was not at risk of a wage-price spiral.

"What we are saying (...) is that we are seeing upward movement in what firms expect to be wage settlements," he said.

"After adjusting for all the sort of the various COVID effects on the data, I think the underlying rate of wage growth is somewhat higher than we would expect it to be at this point in the cycle."