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Bank of England base rate to fall by winter as UK avoids recession

Nick Cheek
Written By:
Nick Cheek

The Bank of England (BoE) will raise the base rate one more time this year before cutting it in winter, according an influential ‘Big Four’ accountancy firm.

The EY Item Club’s spring forecast said the base rate would rise to 4.5% but noted it was hard to make short-term predictions as the last decision was made amid strong economic growth and employment against weak wage increases. 

The base rate will be cut in winter and continue to fall over 2024, the economic firm projected. 

Martin Beck, chief economic adviser to the EY Item Club, said high inflation had been a challenge to the UK’s economy but this was set to cool. 

He added: “Despite challenges in the global banking sector and falling inflation, another rate rise at May’s Monetary Policy Committee meeting is probably more likely than not following a better-than-expected economic performance. Indeed, a stronger economy might mean inflation takes longer to cool down this year.  

“On balance though, we think bank rate should start to come down from this winter.” 

He said the emergence of disruption in the global banking sector had added a risk to rising interest rates and the real economy. 

Beck added: “UK credit conditions could tighten if global financial volatility were to have an impact on banks’ funding costs and lending appetites. This would create another headwind for the housing market, business investment, and consumers’ looking to use debt to compensate for the squeeze on their spending power.” 

House prices will also continue to fall with a 10% decline over the next two years, EY said. 

Recession avoided 

EY Item Club also predicted that the UK’s economy will avoid a recession this year and there will be flat growth instead of a contraction. 

It expects the UK to record 0.2% growth over the year, with much of that happening towards the end of 2023. EY said this would be due to lower energy prices in the latter half of the year which would push down inflation.  

This has improved from the 0.7% decline predicted by the firm in January. 

The revised forecast is down to a better than expected GDP in Q4 2022 and eased inflation. EY still pegs an annual 1.9% growth in the UK economy in 2024. 

The EY Item Club said risks to more favourable outlook was a rise in wholesale gas prices, tightened lending criteria due to disruption in the banking sector and rising central bank rates. 

If inflation falls faster than predicted, the economy could see a quicker recovery in the short term. 

The EY Item Club said inflation would come to just below 3% at the end of 2023, lower than its January forecast of just under 4%. Over the year, inflation will track at around 6.2% on average. 

Ultimately, inflation will fall within the BoE’s target of 2% by the second half of 2024. 

The firm also predicted a slowdown in wage growth at 4.2%, down from 6.4% in 2022. 

Economy turning a corner…slowly

Hywel Ball, UK chair of EY, said the UK economy was “turning a corner, albeit very slowly”. 

Ball added: “Economic performance has been resilient, despite challenges in the latter half of 2022, but the significance of the upgraded outlook shouldn’t be overblown. While easing, the economy’s challenges haven’t gone away overnight: inflation is still in double-digits and energy prices remain historically high. 

“However, perceptions matter and the fact the economy has been able to outperform expectations could help stir a revival in business and consumer confidence. Of course, there is still room for economic surprises, but the balance of risks has become a little more favourable than the last forecast.

“And while subdued growth this year is far from ideal, falling energy prices and inflation, an end to rises in borrowing costs, and growing confidence, mean the economy has a chance to shed some of the gloom it has accumulated recently.”