Inflation is likely to fall quickly this year as energy prices fall, Bank of England Governor Andrew Bailey said.
Speaking to Media Wales, Mr Bailey said a recent easing in inflation could be a sign that “a corner has been turned”.
The bank is not trying to change market expectations that interest rates will peak at 4.5%, he said.
The pandemic and cost-of-living crisis meant a recession was still looming in the UK, he added.
A key component of inflation – how quickly prices are rising – has been rising energy costs as economies recover from Covid and Russia’s war in Ukraine pushes up oil and gas prices.
But wholesale energy costs have come down in recent weeks and energy bills are higher than previously forecast.
This has made the bank more optimistic that inflation could be on an “easier path”, Mr Bailey said.
However, a large number of vacancies means workers are in a stronger position to negotiate for pay increases, which could help push up prices, he said.
- UK inflation falls but food keeps inflation high
The pace of price increases in the UK has slowed slightly, standing at 10.5% by December.
In October, prices increased by 11.1%. In November, inflation was 10.7%.
In November, the bank forecast that inflation would fall to 5.2% by the end of 2023 and Mr Bailey maintained that view. The bank will release new forecasts next month.
The economy has “fell off a cliff” during the Covid pandemic, Mr Bailey said, and while it has partially recovered, wage increases have not kept pace with the pace of price increases, which is still near a 40-year high , said he said.
That means Britain is still likely to fall into a long, shallow recession, he said.
Meanwhile, markets are predicting interest rates will peak at 4.5% and the bank is not distracting them, Mr Bailey said.
Interest rates partly determine how much people pay for mortgages and other loans.
Last October, markets in the UK were expecting interest rates to peak as high as 6% – partly reflecting the ongoing turmoil sparked by Liz Truss’ short tenure as Prime Minister.
Financial markets now expect the bank to raise its main interest rate to 4% from 3.5% on February 2, although there could be a smaller quarter-point hike.
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