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As the cost of living crisis continues, many families have felt the squeeze on their finances as inflation sits over 10 percent. However Prime Minister, Rishi Sunak stated yesterday that consumers would “feel a lot better by the end of the year”.
The cost of living squeeze should start to ease within weeks, Mr Bailey predicted last night.
Speaking at the London School of Economics last night, he said: “We expect to see a sharp fall in inflation during the course of this year, starting probably in a couple of months or so from now.”
In an attempt to curve inflation, thank Bank of England has continued to increase the base rate, the latest one being to 4.25 percent. This is the 11th consecutive rise.
Also speaking at LSE, Mr Sunak said: “We’ve got a plan – trust me, the plan will work.
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“We have got to stick with it, it’s not easy, it’s never easy to weed inflation out of the system.
“The plan we’ve got is the right one. Hopefully you will see that in your bank accounts, you will feel a lot better by the end of the year.”
Economic forecasters from S&P Global as well as Barclays yesterday also signalled light at the end of the tunnel with interest rates expected to fall below three percent next year.
The S&P Global report suggested that the Bank’s latest hike, to 4.25 percent last week, may have been the last for the time being and that rates will come down to 2.5 percent by 2025.
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Mr Bailey said the latest evidence pointed to “more resilient activity” in the economy and jobs market.
There was a setback last week when inflation unexpectedly rose to 10.4 percent – showing that its path “will not be entirely smooth” and that pressures on prices “remain elevated”, he said.
However, he highted that Britain was no longer falling into an imminent recession, adding that inflation should “come down sharply” in the rest of the year.
At the Monetary Policy Committee meeting last week, Mr Bailey admitted: “We were really a bit on a knife edge as to whether there would be a recession, certainly we thought the economy would be quite stagnant.
“I’m not saying it’s off to the races, let’s be clear, but I am more optimistic.”
He backed Chancellor Jeremy Hunt’s Budget assessment last week that inflation will tumble from its 10.4 percent to 2.9 percent by the end of the year, bringing much-needed relief on bills.
The central bank’s MPC is next scheduled to meet to discuss the base rate on Thursday, May 11, 2023.
The Bank is also concerned about growing numbers of workers opting for early retirement – adding to the level of “economically inactive” people.
Mr Bailey said the phenomenon was “part of the reason” why it has had to hike interest rates as much as it has.
He described what would happen if workers who retired early built up enough savings to keep spending at the same level as before they stopped working.
That would mean demand in the economy staying the same even as the supply of labour falls – upsetting the delicate balance between supply and demand in the economy needed to keep inflation in check.
He added: “We should expect this to put upward pressure on inflation in a way that would call for a higher level of interest rates to dampen demand.”
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