Inflation is forecast to temporarily return to the Bank of England’s target of two per cent by summer, according to the central bank. The Bank has revised its predictions for the Consumer Price Index (CPI) after holding interest rates at 5.25 per cent earlier today.
The annual CPI inflation rate is now predicted to return to two per cent in the second quarter of this year, albeit briefly. This represents a significant revision of the Bank of England’s near-term outlook for price growth compared with November's projections.
In a press conference earlier today, the central bank's Governor Andrew Baily highlighted the CPI rate is dropping "faster than expected" but urged people to be cautious in their economic predictions.
He explained: "I think the key thing to stress is that what we look at is the level of the degree of persistence of inflation. So as I said earlier, you’re right that inflation is now falling faster than we expected. And as I said, we do expect it to come near to target this spring.
“And that is, of course, very good news. But we don’t expect that to be the sustained level, it’s going to rise again somewhat thereafter. And it’s really that ‘thereafter period’ that we are most focused on when setting policy. We have to look through the short-run impact that energy prices in particular are having.”
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Inflation is expected to half by summer, according to the Bank
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Under the central bank's medium-term forecast showed, inflation would rise back above two per cent in the third quarter of 2024.
Furthermore, the CPI rate will likely not return to this level until late 2026, which is a year later than the BoE had forecast in November.
In its base rate announcement today, the central bank asserted the UK’s economy will find it growth difficult in the quarters to come.
Mr Bailey added: “We need to see more evidence that inflation is set to fall all the way to the two per cent target, and stay there, before we can lower interest rates.”
The central bank cited "the persistence of domestic inflationary pressures" as to why the CPI rate will not stay below two per cent for long.
Inflation has eased in the UK over the past year, amid the Bank of England hiking the base rate and then holding it at a 15-year high of 5.25 per cent.
Last month, the CPI rate for the 12 months to December 2023 rose to four per cent in a “blip” against the downward trend.
As such, economists are betting cuts to interest rates will not take place until the later half of this year.
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At the latest MPC meeting, two members of the committee voted to raise rates to 5.5 per cent, citing wage rises are happening faster than expected.
Despite this, the remaining six members of the Bank of England’s committee voted to keep interest rates at their current level.
During today’s press conference, Mr Bailey warned there are external economic issues aside from inflation which will contribute to the cost of living crisis.
He added: “It's not as simple as inflation returns to target in the spring and the job is done. Prices for oil and gas suggest that we should not expect further big falls in energy prices.”
