The Bank of England has forecast a sharp growth slowdown and rise in unemployment as it left interest rates on hold in a blow to Chancellor Rachel Reeves.
Gross domestic product is (GDP) expected to increase by just 0.9 per cent this year and unemployment – already at a post-pandemic high – to rise further to 5.3 per cent.
Yet despite the weakness, and a forecast that inflation will fall to its 2 per cent target this spring, Bank officials voted to leave interest rates at 3.75 per cent.
But the knife-edge 5-4 decision by the Bank’s rate-setting Monetary Policy Committee (MPC) was closer than markets had expected with governor Andrew Bailey having the casting vote.
And it is likely to be seen as opening the door to a rate reduction in the spring.
The GDP downgrade suggests growth is slowing sharply – contrasting with Ms Reeves and Keir Starmer’s claims that the economy will start to turn around this year.
It is a far cry from Labour’s pledge to lift growth to the strongest pace among the G7 group of advanced countries.
The dismal forecast was blamed on a worse than expected performance for the economy and rising joblessness over recent months, partly as a result of uncertainty ahead of last November’s Budget.
And the Bank pointed to evidence of employers freezing hiring – after Labour’s raid on national insurance, steep rises in the minimum wage and the imposition of a raft of workers’ rights.
Its latest forecast suggests the economy grew by 1.4 per cent last year. And it predicts that this will slow to 0.9 per cent in 2026 – down from a previous prediction of 1.2 per cent. Next year’s GDP growth outlook was also downgraded, from 1.6 per cent to 1.5 per cent.
The unemployment outlook for this year was upgraded from 5 per cent to 5.3 per cent. The jobless rate currently stands at 5.1 per cent. An increase from 5.1 per cent to 5.3 per cent implies around 72,000 more people on the dole queue.
Governor Andrew Bailey voted to leave interest rates at 3.75%
Mr Bailey signalled that – after rate four cuts last year – there were more to come.
‘We now think that inflation will fall back to around 2 per cent by the spring. That’s good news,’ he said.
‘We need to make sure that inflation stays there, so we’ve held rates unchanged at 3.75 per cent today.
‘All going well, there should be scope for some further reduction in Bank rate this year.’
However, the Bank is no longer saying that rates are on a ‘gradual downward path’ – suggesting little scope to change market expectations that there will be only two cuts this year, after four in 2025.
The Bank’s quarterly Monetary Policy Report painted a damning picture of conditions for the private sector over the last 18 months under Labour. It has been ‘even weaker’ than the sluggish performance for the wider economy even as the public sector has remained ‘robust’.
A survey of business conditions published alongside the report said employment intentions remained ‘slightly negative’.
Firms are cutting jobs by not replacing workers who leave ‘with greater weight placed on technology, automation and AI [artificial intelligence] to boost productivity’.
That will add to fears that the rise of the robots and AI will leave humans on the scrap heap.
The survey added: ‘Higher labour costs and the possible impact of the Employment Rights Bill, alongside weak demand, are also causing firms to scrutinise hiring decisions more closely.’
Shadow chancellor Sir Mel Stride said: ‘Interest rates are staying higher for longer because inflation is rising as a direct result of Labour’s choices.
‘The decisions to hike taxes and increase borrowing to fund more welfare has flatlined growth and pushed up unemployment and inflation. Whilst the economy weakens, the Prime Minister and his closest aides are distracted by their own political survival creating more uncertainty and confusion for British business.
‘Only the Conservatives have a leader with a backbone, the clear plans and the team to deliver a stronger economy and get Britain working again.’
DIY INVESTING PLATFORMS
Affiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.