Bank says inflation almost guaranteed to fall rapidly this year

Andrew Bailey, the Bank’s governor, told MPs during the Treasury Committee that he is “concerned” about the continued persistence of inflation, but expects the rate to halve this year.

He said: “We are concerned about persistence. This is why we raised interest rates at this time.

“I’m very uncertain, particularly about pricing and wages, and we have the largest upside force we’ve ever had on inflation.

“We do put weight on the persistent risks, but there are also very powerful downside forces this year.”

He insisted that there would be a “very powerful unwinding” of inflation throughout the year, which would only be derailed if there is a new external shock, like a development in the Ukraine war, that it cannot foresee.

Silvana Tenreyro, an external member of the Bank’s nine-strong MPC, stressed that declining inflation is all but guaranteed.

She told MPs: “Unless there is another big development that we do not or cannot know about, such as a new energy shock, I think a fall in inflation is pretty much guaranteed.”

Ms Tenreyro, who was one of two MPC members to vote to hold rates at 3.5 per cent this month, said she would consider cutting interest rates, given the risk that inflation could fall substantially below the per cent target in the medium term.

She said: “Where we stand right now, I can see myself considering a cut.”

Ms Tenreyro also pointed out that the Bank could not have brought inflation down to its 2 per cent target last year, because it would have required engineering significant deflation in the services sector.

She warned: “It would have been incompatible with our remit to have inflation at target last year. It would have meant a massive recession.”

Huw Pill, the Bank’s chief economist, added that it is important to exercise caution when looking ahead because of the very nature of economic “shocks”.

Politicians and policy makers will find out on Friday if the UK managed to pull off a double escape from recession last year.

Experts are currently forecasting that gross domestic product (GDP) remained unchanged in the last quarter of 2022, with growth hitting 0.0%.

If that comes true, or if GDP rises, then the UK will have narrowly avoided a recession for the second time in a year.

A country is considered to be in recession of GDP shrinks for two quarters in a row. Third-quarter GDP fell by 0.3%, so any fourth-quarter fall would bring recession to the UK.

The country was spared a recession earlier in the year when the Office for National Statistics (ONS) revised its GDP figures for the second quarter.

The ONS had initially estimated a 0.1% fall in GDP between April and June, but this was later revised to a rise of 0.2%.

Samuel Tombs at research outfit Pantheon Economics said he thinks that GDP hit 0.0% growth in the last three months of 2022.

“Heavy snow in mid-December appears to have hit retail sales and construction output. In addition, the hospitality sector struggled during December’s rail strikes,” he said in a note released this week.

“Meanwhile, surveys suggest that manufacturing output continued to fall.”

But even if the UK managed to escape recession again last year, it looks set to fall into recession some time in 2023.