London Daily

Focus on the big picture.
Tuesday, Dec 30, 2025

Bank of England says recession expected to be shorter and less severe

Bank of England says recession expected to be shorter and less severe

The UK is set to enter recession this year but it will be shorter and less severe than previously thought, according to the Bank of England.

The slump is now expected to last just over a year rather than almost two as energy bills fall and price rises slow.

As a result fewer people are likely to lose their jobs, but the economy remains fragile, warned the Bank.

The forecast comes as interest rates were raised to 4% from 3.5%, their highest level in over 14 years.

The Bank has been putting up interest rates in a bid to tackle the soaring cost of living.

Inflation, the rate at which prices rise, remains close to its highest level for 40 years - more than five times what it should be.

Bank governor Andrew Bailey said inflation now appears to be falling, but warned there are still "big risks out there" which could continue to have an impact on the economy.

On Thursday, the Bank suggested interest rates may be nearing a peak, indicating it will only raise rates further if it sees signs that inflation will remain high.

However, the country is not forecast to bounce back to pre-Covid levels until 2026, which Mr Bailey said was "extraordinary".

"Covid has had bigger long-run effects than we thought it would, particularly in terms of things like the labour supply and people choosing to come out of participating in the labour force."

Higher interest rates are meant to encourage people to save more and spend less, helping to stop prices rising as quickly.

Thursday's hike in borrowing costs is the tenth in a row and will add pressure to many households already struggling with the cost of living.

The impact will be felt by borrowers through higher mortgage and loan costs, although it should also mean better returns for savers.

Homeowners with a typical tracker mortgage will now pay about £49 more a month. Those on standard variable rate mortgages face a £31 increase.

The Bank's predictions come after a separate forecast from the International Monetary Fund (IMF) suggested the UK would be the only major economy to shrink in 2023, performing worse than even Russia.

It is slightly more pessimistic than the IMF and it said that the UK economy would be weak for some time.

The UK has a record 1.1 million job vacancies while the number of people classed "economically inactive" - which is people aged between 16 and 64 not looking for work - has risen.

Mr Bailey said that in most countries, the number of economically inactive workers had fallen since the height of the pandemic, but this was not the case in the UK.

"That is what marks the UK out," said Mr Bailey.

A recession is defined as when the economy shrinks for two consecutive three-month periods. Typically companies make less money and cut jobs, leaving the government with less tax revenue to spend on public services.

The Bank is now predicting:

*  The economy will shrink by 1% versus 3%, largely because "wholesale energy prices have fallen significantly."

*  The unemployment rate will peak at 5.3% rather than 6.4%. It is currently 3.7%.

*  Inflation will fall back to 8% in June before dropping further to 3% by the end of the year.

*  If workers get big pay rises it could lead to a slower fall in inflation.

'I've docked my wage and reduced opening hours to cut costs'

Business owner Jo Williams is worried about the extra costs of an interest rate rise for her bed sales company and gift shop in Nuneaton.

The mortgage costs for the bed shop warehouse has gone up by £150 per month and her own home mortgage is also creeping higher.

To make up those losses, Jo has cut opening times from 9.30am to 5pm, to 10am to 4pm and for the first time in eight years has made one member of staff redundant.

"We tried everything to secure that job but it's a case of having to keep a very, very close eye on cash flow right now," she explained.


Chancellor Jeremy Hunt said the government would act in "lockstep" with the Bank to tackle inflation. This meant resisting the urge "to fund additional spending or tax cuts through borrowing, which will only add fuel to the inflation fire".

But Labour's shadow chancellor Rachel Reeves said: "The reality is that under the Tories growth is on the floor, families are worse off and we are stuck in the global slow lane."


Bank of England Governor Andrew Bailey: 'We think inflation will come down rapidly'


Newsletter

Related Articles

0:00
0:00
Close
Europe’s Largest Defence Groups Set to Return Nearly Five Billion Dollars to Shareholders in Twenty Twenty-Five
Abu Dhabi ‘Capital of Capital’: How Abu Dhabi Rose as a Sovereign Wealth Power
Diamonds Are Powering a New Quantum Revolution
Trump Threatens Strikes Against Iran if Nuclear Programme Is Restarted
Apple Escalates Legal Fight by Appealing £1.5 Billion UK Ruling Over App Store Fees
UK Debt Levels Sit Mid-Range Among Advanced Economies Despite Rising Pressures
UK Plans Royal Diplomacy with King Charles and Prince William to Reinvigorate Trade Talks with US
King Charles and Prince William Poised for Separate 2026 US Visits to Reinforce UK-US Trade and Diplomatic Ties
Apple Moves to Appeal UK Ruling Ordering £1.5 Billion in Customer Overcharge Damages
King Charles’s 2025 Christmas Message Tops UK Television Ratings on Christmas Day
The Battle Over the Internet Explodes: The United States Bars European Officials and Ignites a Diplomatic Crisis
Princesses Beatrice and Eugenie Join Royal Family at Sandringham Christmas Service
Fine Wine Investors Find Little Cheer in Third Year of Falls
UK Mortgage Rates Edge Lower as Bank of England Base Rate Cut Filters Through Lending Market
U.S. Supermarket Gives Customers Free Groceries for Christmas After Computer Glitch
Air India ‘Finds’ a Plane That Vanished 13 Years Ago
Caviar and Foie Gras? China Is Becoming a Luxury Food Powerhouse
Hong Kong Climbs to Second Globally in 2025 Tourism Rankings Behind Bangkok
From Sunniest Year on Record to Terror Plots and Sports Triumphs: The UK’s Defining Stories of 2025
Greta Thunberg Released on Bail After Arrest at London Pro-Palestinian Demonstration
Banksy Unveils New Winter Mural in London Amid Festive Season Excitement
UK Households Face Rising Financial Strain as Tax Increases Bite and Growth Loses Momentum
UK Government Approves Universal Studios Theme Park in Bedford Poised to Rival Disneyland Paris
UK Gambling Shares Slide as Traders Respond to Steep Tax Rises and Sector Uncertainty
Starmer and Trump Coordinate on Ukraine Peace Efforts in Latest Diplomatic Call
The Pilot Barricaded Himself in the Cockpit and Refused to Take Off: "We Are Not Leaving Until I Receive My Salary"
UK Fashion Label LK Bennett Pursues Accelerated Sale Amid Financial Struggles
U.S. Government Warns UK Over Free Speech in Pro-Life Campaigner Prosecution
Newly Released Files Shed Light on Jeffrey Epstein’s Extensive Links to the United Kingdom
Prince William and Prince George Volunteer Together at UK Homelessness Charity
UK Police Arrest Protesters Chanting ‘Globalise the Intifada’ as Authorities Recalibrate Free Speech Enforcement
Scambodia: The World Owes Thailand’s Military a Profound Debt of Gratitude
Women in Partial Nudity — and Bill Clinton in a Dress and Heels: The Images Revealed in the “Epstein Files”
US Envoy Witkoff to Convene Security Advisers from Ukraine, UK, France and Germany in Miami as Peace Efforts Intensify
UK Retailers Report Sharp Pre-Christmas Sales Decline and Weak Outlook, CBI Survey Shows
UK Government Rejects Use of Frozen Russian Assets to Fund Aid for Ukraine
UK Financial Conduct Authority Opens Formal Investigation into WH Smith After Accounting Errors
UK Issues Final Ultimatum to Roman Abramovich Over £2.5bn Chelsea Sale Funds for Ukraine
Rare Pink Fog Sweeps Across Parts of the UK as Met Office Warns of Poor Visibility
UK Police Pledge ‘More Assertive’ Enforcement to Tackle Antisemitism at Protests
UK Police Warn They Will Arrest Protesters Chanting ‘Globalise the Intifada’
Trump Files $10 Billion Defamation Lawsuit Against BBC as Broadcaster Pledges Legal Defence
UK Says U.S. Tech Deal Talks Still Active Despite Washington’s Suspension of Prosperity Pact
UK Mortgage Rules to Give Greater Flexibility to Borrowers With Irregular Incomes
UK Treasury Moves to Position Britain as Leading Global Hub for Crypto Firms
U.S. Freezes £31 Billion Tech Prosperity Deal With Britain Amid Trade Dispute
Prince Harry and Meghan’s Potential UK Return Gains New Momentum Amid Security Review and Royal Dialogue
Zelensky Opens High-Stakes Peace Talks in Berlin with Trump Envoy and European Leaders
Historical Reflections on Press Freedom Emerge Amid Debate Over Trump’s Media Policies
UK Boosts Protection for Jewish Communities After Sydney Hanukkah Attack
×