BoE’s Bailey: Faster public pay could shift inflation risks

Bank of England Governor Andrew Bailey warned that faster public-sector pay growth could change how the central bank assesses inflation risks. Official figures show public-sector pay rose 4.8% year-on-year in the first quarter of 2026, compared with 3.0% in the private sector.

The gap between public- and private-sector wages has persisted for 12 months. For each of the past 12 months, public-sector pay excluding bonuses increased at a faster annual rate than private-sector pay, the longest run since 2021 and before that 2011.

The Bank has typically focused on private-sector wages when judging inflation pressures because those wages tend to move more quickly with economic conditions and are more likely to feed into prices charged by businesses. The recent pattern has prompted closer scrutiny of public-sector pay trends.

Bailey warned: “We have got more of a wedge opening up between private-sector pay and public-sector pay.”

He said the Bank may need to reassess its assumptions about how wage pressures pass into prices if the gap continues. Policymakers are monitoring whether public-sector pay trends could translate into broader price pressures.

Bailey also discussed recent moves in UK government bond markets. Yields on the 10-year gilt rose sharply to levels not seen since 2008 and increased by more than comparable US and German maturities. He downplayed domestic politics as the primary cause of the yield rise but said the market reaction highlighted the importance of confidence in public finances.

He added: “People can take a message from the market at that point. The fiscal rules are important.”

On monetary policy, Bailey said the Bank can adopt a cautious, wait-and-see approach while it monitors international developments, including the conflict involving Iran, and their effects on inflation and interest rates. He indicated policymakers would need confidence that any geopolitical resolution would endure before moving toward rate cuts later in the year.

The Bank continues to track inflation closely. The sustained gap between public- and private-sector pay introduces a new variable into forecasts that have previously placed greater weight on private-sector wage dynamics.