Higher bills will push up inflation, warns Bank

Reuters

The UK will only narrowly avoid a recession, according to the Bank of England, after it downgraded its economic outlook in a blow for the government.

While the Bank cut interest rates to 4.5% from 4.75% as expected, it also predicted the economy shrank in the final three months of last year and will grow only marginally in the first three months of this year.

Inflation is also expected to "rise quite sharply" later this year due to higher water bills, bus fares and energy costs and take longer to fall back to the Bank's 2% target.

The government has made the growing the economy one of its key policies and last week the chancellor announced a number of measures to try to boost the UK's performance.

However, the Bank expects the economy will remain sluggish for some time.

It also said it would take a "careful and gradual" approach to future interest rate cuts as it weighs up a number of factors that could affect inflation, including threats of trade tariffs from US President Donald Trump.

Bank of England governor Andrew Bailey said: "We'll be monitoring the UK economy and global developments very closely and taking a gradual and careful approach to reducing rates further.

"Low and stable inflation is the foundation of a healthy economy and it's the Bank of England's job to ensure that."

Chancellor Rachel Reeves said the interest rate cut was "welcome news".

"However, I am still not satisfied with the growth rate. Our promise in our Plan for Change is to go further and faster to kickstart economic growth to put more money in working people's pockets."

In its quarterly inflation report, the Bank said economic growth has been "broadly flat since March last year".

The UK economy showed zero growth between July and September.

For the following three months, the Bank of England now expects it to shrink by 0.1% against a previous forecast for 0.3% growth.

A recession is defined as two back-to-back three-month periods of economic contraction.

For the first three months of this year, the Bank now expects the economy to grow by just 0.1%, down from its 0.3% forecast published last November.

The latest official growth figures for the UK economy will be published next Thursday.

Inflation is forecast to rise briefly to 3.7% later on this year and while the Bank expects it to ease, it will take until the latter part of 2027 instead of earlier that year to fall back to the 2% target.