BY G9IJA
The UK economy will avoid falling into recession this year, the Bank of England has predicted.
The Bank forecast comes as it increased interest rates to 4.5% from 4.25% in an attempt to slow soaring price rises.
But the Bank admitted it will take longer for inflation to fall, due to food prices remaining elevated.
The increase in interest rates will mean higher mortgage and loan payments for some, but could benefit savers.
The change in outlook for the economy contrasts sharply with the Bank’s forecast last November when it said the UK would enter the longest recession in its history, lasting two years.
It subsequently altered its forecast in February when it predicted a downturn lasting more than a year.
The UK economy grew by 0.1% in the final three months of 2022.
The Bank’s Monetary Policy Committee (MPC) said on Thursday that growth was “likely to have been broadly flat around the turn of the year” and “was now expected to increase slightly in the second quarter compared with the 0.4% decline” previously forecast.
It reckons that when the effects of industrial action and the extra Bank Holiday for King Charles’ Coronation are stripped out, the economy will have grown by 0.2% in the first three months of the year as well as between April and June.
The Bank said this is “materially stronger” than expected than the last time it made its predictions in February.
Official figures on the UK economy’s performance for the first three months of this year will be released on Friday.
The Bank said the changes to its growth forecasts were the biggest upgrade in 26 years, since the Bank of England was granted independence from the government in 1997.
Falling energy prices as well as measures to help businesses and households announced in the Budget last month have led the Bank to change its forecasts.
However, inflation is expected to take longer to ease, despite the Bank raising interest rates 12 times in a row since December 2021 to the highest level in almost 15 years.
Putting up interest rates can mean people are more likely to save money and less likely to borrow it.
In theory, this means they have less money to spend so will buy fewer things, which should help stop prices rising as quickly. It also makes it harder for firms to borrow money and expand.
Prices are currently rising at an annual rate of 10.1%, which is more than five times the Bank’s 2% target.
The Bank said the rate would “fall sharply in April” but not as far or as fast as it previously thought.
Inflation is now expected to drop to 5% by the end of this year, above the 4% previously predicted. That is still more than twice the Bank’s target.
A key pledge by the Conservative government has been to halve the rate of inflation by the end of the year.
The Bank blamed Russia’s war on Ukraine for stubbornly high food prices as well as supply chain issues in Europe.
Earlier this year, some supermarkets had to introduce limits for shoppers on some fresh goods after hot weather in Europe and North Africa affected levels of produce.
The Bank also said that the impact of all the interest rate rises had yet to be fully felt by Britons, in particular those people who have a fixed-rate mortgage.
Around 85% of all mortgages are fixed-rate, according to the Bank of England, and around 1.3 million households are expected to reach the end of their deals this year.
The Bank estimates that people looking to re-mortgage this year could face a £200 hike in monthly payments based on current rates.