Bank upgrades Britain’s short-term economic outlook, but places country in deepest long-term stagnation since the interwar years

The Bank of England upgraded its economic outlook for the UK in 2023 as it increased interest rates for the tenth successive time to 4 per cent, but also showed that the UK is in the midst of the weakest 20-year period of growth since 1938, the Resolution Foundation said today (Thursday).

The Bank of England raised interest rates to 4 per cent – their highest level in 14 years – but said this may be as high as interest rates go, hinting that market expectations of a rise to 4.5 per cent by the middle of next year are overdone.

The Foundation notes that while mortgages rates continue to fall from their autumn peak, the two million mortgagor households on fixed-rated deals that are due to re-mortgage this year are still set to face huge increases in their housing costs. Mortgagors as a whole are on track to experience the deepest income falls of any group this year and next.

The Bank also upgraded its economic outlook for 2023, reducing the size of the UK’s economic downturn from -1.6 to -0.5 per cent. This upgrade is welcome, says the Foundation, though it cautions that the country is still in the midst of a prolonged, and far deeper living standards downturn, with typical incomes on track to fall by 7 per cent over two years.

More worrying, says the Foundation, is the UK’s long-term economic performance. The Bank forecasts that the UK is currently in the midst of a 20-year period in which annual growth averages just 1.0 per cent between 2006 and 2025 – the weakest 20-year period of growth since 1919-1938.

James Smith, Research Director at the Resolution Foundation, said:

“The Bank’s decision to raise interest rates and the outlook for the economy were both expected, and the latter is certainly welcome as the effects of falling gas prices feed through into the wider economy.

“But while the UK’s economic prospects are improving, they remain bleak. Families are living through a sharp two-year living standards downturn, and Britain is living through a 20-year growth stagnation – the worst since the interwar years.”