Hope still for 2023 – Bank of England chief gives glimmer of optimism

Bank of England governor Andrew Bailey is “more optimistic” on the economy. Despite raising interest rates yesterday to a 14-year high of 4.25 percent, the cautious Bank governor said he is “much more hopeful”, following fears only last month that the UK would fall into a recession.

Mr Bailey oversaw the 11th consecutive rise in the central bank rate – it was just 0.1 percent in December 2021 – but, in a welcome shift of thinking, there is also an expectation that rates may have peaked.

In an upbeat message, he said Britain was no longer falling into an imminent recession, adding that inflation should “come down sharply” in the rest of the year.

Mr Bailey admitted: “We were really a bit on a knife edge as to whether there would be a recession, certainly we thought the economy would be quite stagnant.

“I’m not saying it’s off to the races, let’s be clear, but I am more optimistic.”

He backed Chancellor Jeremy Hunt’s Budget assessment last week that inflation will tumble from its 10.4 percent to 2.9 percent by the end of the year, bringing much-needed relief on bills.

Also yesterday it was confirmed average council tax bills will top £2,000 for the first time, rising by a typical 5.1 per cent next month.

Mr Bailey said: “What I can tell you is that we’ve seen signs of inflation really peaking now.

“Of course it is far too high. We think it’s going to come down sharply, really from the early summer onwards, but we haven’t seen that happen yet. We need to see it starting to come down progressively and get back to target.”

The Bank sharply uprated predictions for the economy, expecting growth in the second quarter rather than the forecast 0.4 percent fall.

That would avoid a technical recession which is defined as two consecutive periods of contraction.

Despite turmoil in international banking, Mr Bailey said a 2008-style crunch would not hit Britain, adding our financial system was “resilient”.

Mr Hunt backed the rate rise, saying: “With rising prices strangling growth and eroding family budgets, the sooner we grip inflation the better for everyone.”

He said the Government would play its part “by being responsible with the public finances”.

Minutes of the Bank rate-setting Monetary Policy Committee indicated no further rises unless there are “more persistent pressures” on prices, as its nine members voted to raise rates by seven to two.

Mark Grant, from brokers The Business Finance Branch, said that “could give businesses some confidence and certainty.

“It says [Consumer Prices Index] inflation increased unexpectedly in the latest release but it remains likely to fall sharply.

“Then business confidence will return and grow, resulting in investment in assets and staff, and increased productivity and growth.”

There were also hopes that mortgage payers might not be as badly hit as feared by the rates increase, as the biggest building society led the way in lowering charges.

The Nationwide is reducing rates across its fixed and tracker mortgage range by up to 0.45 percentage points, effective from today.

It was the latest economy boost: economists last month forecast Britain will avoid a recession this year, with inflation falling by at least half before the end of 2023.

Unemployment is set to stay low with the workforce returning to pre-Covid levels and Government debt is due to fall, said the National Institute of Economic and Social Research think tank.

The FTSE stock market hit a record high in February, boosting pensions and investments.

While Chris Barry, director at law firm Thomas Legal, said: “Despite the quarter-point raise, it’s not all doom and gloom.

“The spring property market is also around the corner and many sellers haven’t seen their property values plummet anywhere near as much as some had predicted. There are many reasons to be cheerful.”

Riz Malik, from broker R3 Mortgages, added: “There’s broad agreement that base rate hikes could be limited and that once inflation reaches its target, rates could even be reduced.”

The decision to lift rates from four percent came after inflation rose unexpectedly from 10.1 percent to 10.4 last month. The pace at which prices are rising is close to its highest for 40 years – more than five times the target.

The interest rate increase also follows the collapse of two US banks and the billion-pound rescue of major lender Credit Suisse.

Mortgage costs are still due to rise: the average two-year fixed rate is now 5.32 percent, with a five-year fix being five percent, says Moneyfacts.

A year ago they were 2.65 and 2.88 percent.

More than one million people face re-mortgaging to a far higher rate this year, as fixed deals locked in at a time of record-low interest come to an end.

Almost six in 10 deals up for renewal in 2023 are less than two percent – well below current rates.

An average borrower coming off a two-year fix will see their rate rise from 2.57 to 5.32 percent.

On a £200,000 mortgage over 25 years, a typical borrower will see monthly repayments rise by £303 to £1,207 – an extra £3,636 a year.

• Additional reporting by Robert Kellaway