Inflation will hit the Bank of England’s 2% target within a matter of months, the Banks says, but only “temporarily” before it rises again later in the year.
The Bank’s latest projections, accompanying today’s decision to hold interest rates at 5.25% show inflation is set to hit 2% in the second quarter of this year, but will rise again in the third and fourth, as the comparative figures for energy prices.
Inflation will then stay above target through 2025 and 2026, only returning to 2% in 2027. The Bank says this was due to "the persistence of domestic inflationary pressures".
The worse long-term picture on inflation may pour cold water on hopes that the Bank will cut its interest rates soon.
GDP, meanwhile, is now expected to stagnate in the first quarter of this year, but will pick a little up with 0.5% growth in 2025. The unemployment rate is expected to rise, but only to a peak of 5% within the forecast period, which would still be low by historic standards.
The public still awaits official figures that will show whether the UK ended 2023 in a technical recession, which is defined as two consecutive quarters of negative growth. The economy shrank by 0.1% in the third quarter of last year, while October and November GDP figures largely cancelled themselves out, meaning that a modest decline in December could mean recession.
It comes as the Bank held its interest rates at 5.25% for the fourth consecutive meeting, as was widely expected. Markets think the Bank will look to cut rates in May or June.
The projections are all based on market-implied interest rates at the time of the meeting, which suggested that the Bank would cut rates in May. But if inflation does remain elevated for years, the Bank is likely to cut rates more slowly than the market expects.
