Andrew Bailey

The UK economy is will still enter a recession but the BoE’s newest projections show that inflation is set to fall rapidly from spring.

Governor Bailey also mentioned that there is a risk of the UK’s tight labour market creating more inflationary pressures, which could force the bank to intervene by raising interest rates. He did not comment on where the bank sees interest rates peaking, but noted that the market view on interest rates getting to a peak of 6% was too high, Business Live reported.

The current market thinking on interest rates is that they could peak at around 4.5%.

Mr Bailey said: “We don’t target a particular peak, but what I will say is this, back in November, and quite unusually for us, we thought the market curve, and therefore the market’s view of what they thought we would do, was out of line with our own thinking.

“The reason was quite frankly there was still something which I would call a UK risk premium in there following the events of September and October.

“If you go back to the height of that period, the peak of what the market thought we were going to get to was over 6%, but the time we did our forecast in November it was 5.2%, it is now down to 4.5%.

“Now I am not endorsing 4.5%, but what you may have noticed in December is that we did not include the comment that we made in November about the market being in our view rather out of line.”