Victory in the war on inflation will require British workers to accept lower pay deals and companies to rein in their profits, a senior Bank of England policymaker has said. Sarah Breeden, one of the central bank’s four deputy governors, said there was still “some way to go” before inflation would fall back to the 2% target set by the government for the Bank to achieve on a sustainable basis. In a speech almost a week after she and fellow policymakers kept interest rates unchanged at the highest levels since the 2008 financial crisis, she said inflation in the service sector of the economy remained too high to meet the Bank’s target. “Some combination of moderation in pay pressures and firms’ margins will be required for services inflation to return to more normal rates,” she said. Threadneedle Street has stressed that it needs to see more evidence of inflation falling back to its target, and sticking at those levels, before it can deliver its first cut in interest rates since the start of the Covid pandemic. Inflation tumbled to 4% in December, according to the latest official figures, having dropped from more than 10% a year earlier. Most economists expect it will fall below 2% within months amid a decline in global energy prices. Financial markets anticipate that falling inflation and near-stagnant economic growth should open the door to the Bank cutting interest rates by as much as one percentage point this year, from the current level of 5.25%. The Bank’s policymakers are, however, concerned that underlying inflationary pressures from the domestic economy could drive inflation closer to 3% by the end of the year, highlighting risks from rising service sector prices and resilient wage increases. Speaking at an event for the UK Women in Economics Network, Breeden said that indicators of annual pay growth remained in the 6-7% range, significantly higher than recorded in recent years. “[This is] still elevated and, given the current weakness in productivity growth, several percentage points higher than what is consistent with the inflation target, were they to persist,” she said. Annual growth in average workers’ earnings, excluding bonuses, dipped to 6.6% in the three months to November, down from a peak of almost 8% in July – the highest level since comparable records began in 2001. However, the figures come amid a marked slowdown in the UK labour market, including a steady decline in vacancies and rising levels of unemployment.