The Bank of England says that the UK will go into recession this year, but it will be shorter and less bad than was thought before.
As energy bills go down and price increases slow, economists now think the slump will last just over a year instead of almost two.
Because of this, fewer people are likely to lose their jobs, but the Bank warned that the economy is still weak.
The prediction comes after interest rates were raised from 3.5% to 4%, making them the highest they’ve been in 14 years.
The Bank has been raising interest rates to try to stop prices from going up too fast.
The pace at which prices are increasing (inflation) is still five times too high, despite being close to its highest level in 40 years.
An increase in the interest rate is expected to cause consumers to conserve more money and reduce their spending, so moderating the rate of inflation.
Andrew Bailey, the head of the Bank, said that inflation, which is the rate at which prices go up, seems to be going down. However, he warned that there are still “big risks out there” that could keep having an effect on the economy.
Thursday, the Bank said that interest rates may be close to their highest point and that it won’t raise rates anymore unless it sees signs that inflation will stay high. Some economists think that the Bank will keep interest rates at 4.5 percent for a while before thinking about lowering them.
But the country won’t be back to where it was before Covid until 2026, which Mr. Bailey called “extraordinary.”
“Covid has had bigger long-term effects than we thought it would, especially on the labor supply and the number of people who choose to leave the labor force,”
Borrowing costs have increased for ten days in a row now. Many families will feel even more pressure because of this increase in the cost of living.
Borrowers will pay more for their mortgages and loans because of this, but savers should get a better return on their money.
With a typical tracker mortgage, homeowners will now have to pay about £49 more each month. People with standard variable rate mortgages will have to pay an extra £31.
The Bank’s predictions come after a separate forecast from the International Monetary Fund (IMF) said the UK would be the only major economy to shrink in 2023, doing worse than even Russia.
It is a bit more negative than the IMF, and it said that the UK economy would be weak for a long time.
There are a record 1.1 million jobs open in the UK, but the number of “economically inactive” people, or people between 16 and 64 who are not looking for work, has gone up.
Mr. Bailey said that since the peak of the pandemic, the number of economically inactive workers had gone down in most countries but not in the UK.
“That’s what makes the UK stand out,” Mr. Bailey said.
The Bank used to think that the UK would go into recession at the end of last year and that the downturn would last until the middle of next year. It now thinks that the slump will be shorter, starting in the first three months of this year and lasting until the end of March next year.
When the economy shrinks for two straight three-month periods, this is called a recession. Companies usually make less money and cut jobs when the economy is bad. This means that the government has less tax money to spend on public services.
Now, the Bank is saying:
The economy will shrink by 1% instead of 3%, mostly because “wholesale energy prices have fallen significantly.”
The rate of unemployment will peak at 5.3% instead of 6.4%. At the moment, it is 3.7%.
Inflation will go back down to 8% in June, and then it will go down even more to 3% by the end of the year.
If workers get big pay raises, inflation might fall more slowly.
“I’ve cut my pay and shortened business hours to save money.”
Jo Williams is worried about how much more it will cost her bed sales business and gift shop in Nuneaton if interest rates go up.
The mortgage on the warehouse for the bed shop has gone up by £150 a month, and so has the mortgage on her own home.
To make up for these losses, Jo has changed the hours of operation from 9.30 am to 5 pm to 10 am to 4 pm and fired a worker for the first time in 8 years.
“We did everything we could to get that job, but right now we have to pay close attention to cash flow,” she said.
Jeremy Hunt, the chancellor, said that the government would fight inflation “in lockstep” with the Bank. This meant not giving in to the temptation “to pay for more spending or tax cuts by borrowing, which would only make inflation worse.”
But Rachel Reeves, Labour’s shadow chancellor, said, “The truth is that growth is flat under the Tories, families are worse off, and we are stuck in the global slow lane.”
