Real household incomes are no longer expected to fall this year and the UK is likely to avoid a recession, the Bank of England’s Monetary Policy Committee has said.
The boost from the lower Energy Price Guarantee is one factor pushing up the real income forecast, as is stronger growth in household labour income, particularly in the final quarter of last year, it added.
The MPC said in its Monetary Policy Report today: ‘The price cap is based primarily on wholesale energy costs, which have fallen further since the February report, representing a further boost to real income growth.’
The central bank’s governor, Andrew Bailey, told reporters there had been ‘greater resilience in the economy than we expected’ amid allegations of being overly gloomy in previous forecasts.
Growth: Bank of England governor Andrew Bailey upped UK growth forecasts today
Households: Real household incomes are no longer expected to fall this year, the Bank of England said today
Higher household incomes are also expected to support stronger consumption growth this year than had been projected in February.
However, nominal pay growth has fallen back slightly, to a rate close to the projection in the February Report, the MPC noted.
The MPC said: ‘Models estimated by Bank staff suggest that households’ short-term inflation expectations, which tend to move closely with actual inflation, have been an important driver of the pickup in wage growth.
‘These are, in turn, expected to be the key driver of the projected easing in wage growth, as headline inflation falls reflecting lower energy prices, base effects and easing cost pressures.’
Easing: The pace of UK wage growth is easing, according to the Bank’s top brass
Inflation going down, growth rates on the up
The MPC expects CPI inflation to fall back ‘sharply’ from April and to about 8.2 per cent in the second quarter.
By the end of the year inflation is likely to be around 5 per cent, it added. High food prices, however, look set to keep the pace of the decline in inflation slower than expected.
By the end of 2024, inflation is likely to be closer to the 2 per cent target and by 2025 it will be lower than 2 per cent.
That is around three quarters later than in the February report, predominantly reflecting higher than expected food price inflation.
Predictions: UK inflation is expected to fall sharply from the second quarter, the Bank said
Higher forecasts for food prices had added about 1 percentage point to future inflation compared with February, the MPC said.
Bailey also said the outlook for inflation further ahead remained ‘more uncertain.’
Long criticised for being too gloomy in outlook, the MPC upped growth forecasts for the UK economy by the highest level on record.
The central bank no longer predicts a recession after it revised up its growth forecasts from dismal numbers released in February, the biggest such improvement since it first published forecasts in 1997.
The change in outlook for the economy contrasts sharply with the MPC’s forecast six months ago when it said the UK would enter the longest recession on record.
Growth predictions, however, remain sluggish. The MPC thinks the economy will grow by 0.25 per cent this year, against predictions of a 0.5 per cent contraction announced in February. GDP is also now expected to rise by 0.75 per cent next year.
Cheaper energy, fiscal stimulus and improved business and consumer confidence mean the central bank now no longer thinks there will be a recession this year, and expects the economy to be 2.25 per cent bigger in three years’ time than it did before.
Housing prices ‘stabilise’ and fixed mortgages grow
Mortgages and house prices have been a key theme in today’s update from the MPC.
In the year to February, Office for National Statistics data showed house price growth slowed to 5.5 per cent.
Buried deep in its report, the MPC said its contacts had suggested UK house prices could ‘stabilise’.
It added: ‘In 2023 Q1 and into April, confidence in the housing market appeared to have picked up a little, relative to the weak position in the previous quarter.
Fixed rates: Bailey said the proportion of fixed-rate mortgages had risen significantly
‘Viewings started to pick up and more properties were put up for sale. Contacts expected house prices to stabilise after some months of modest declines. Transaction levels were expected to be lower than in 2022, but roughly normal. That was stronger than expected at the start of the year.’
On mortgages, Bailey said that while mortgage rates have eased slightly in recent months, they remain ‘much higher’ than a year ago.
The central bank said that although the rates being quoted on new mortgages have risen by around 300 basis points, the effective rate on new lending has risen by less.
This is because, it said, fixed-rate mortgages account for 85 per cent of outstanding mortgages, meaning many have yet to pay higher rates.
Bank of England decision-making under pressure
Throughout a press conference with reporters today, Bailey and his team repeatedly came under fire over their predictions, being asked whether they had been too gloomy and why they always seemed to end up being wrong.
As ever, today’s interest rate increase, forecasts and insights have come under heavy scrutiny.
Suren Thiru, economics director at ICAEW, said: ‘The Monetary Policy Committee needs to be more forward looking in setting interest rates rather than being overly focused on current inflation given the long-time lag between rate rises and its impact on the broader economy.
‘With most of the interest rate rises yet to pass through to households and businesses, the Bank of England risks overdoing the rate hikes, adding to squeeze on our growth prospects and aggravating the cost-of-living crisis.’
Meanwhile, Michael Hewson, chief market analyst at CMC Markets UK, said: ‘The bank now sees 0.2 per cent growth for Q1, the numbers of which are due for release tomorrow, and 0.2 per cent for Q2 as well, while upgrading its GDP forecast for 2023 to 0.25 per cent from -0.3 per cent and indicating a 0.75 per cent expansion in 2024.
‘While this is welcome news it’s also important to remember that just over six months ago the bank was predicting a two-year recession, so their track record isn’t particularly great.’
Nicholas Hyett, an investment analyst at Wealth Club, said: ‘The challenge Andrew Bailey faces from here is keeping a perfect bowl of economic porridge at just the right temperature.
‘Global economic gusts, not least the growling bear of a US banking crisis, are unpredictable.’
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