British economic growth 'expected to be below pre-pandemic rates' for three years

The Bank of England hiked its official rates to 5.25%.

The Bank of England has forecast the British economic growth is set to stagnate over the next three years as the central bank again hiked official UK interest rates to 5.25% in its fight against inflation there. 

It has projected inflation in Britain will cool from just under 8% in June to 5% by the end of the year, but would stay well above its 2% target rate for some time. 

British inflation has flared higher than in many other European countries, despite it raising interest rates beyond levels imposed by the European Central Bank. In July, eurozone-wide inflation was running at 5.3%, which included 6.5% in Germany, 5% in France, 4.6% in Ireland, and a rate of as low as 2.1% in Spain.

"Sharp increases in food, energy, and other import prices over the past two years have had second-round effects on domestic prices and wages," the bank said in new report that also highlighted the tight UK labour market in its assessment of the future path of British inflation, that however made no explicit reference to the fall-out of Brexit. 

British inflation will fall back to its 2% target in 2025, the Bank of England has forecast, which suggests that British interest rates will stay at elevated levels for some time. 

GDP

The Bank of England projects British economic growth will be relatively weak in the next three years. Its new forecasts see British GDP growing by 0.8% this year, by only 0.3% in 2024, by 0.3% also in 2025, before quickening slightly to grow by 1.1% in 2026.  

"GDP growth is expected to be below pre-pandemic rates in the medium term, also reflecting relatively weak potential supply and waning boost from fiscal boost," according to the new report. 

"Relative to the May projection, quarterly GDP growth is expected to be weaker throughout much of the forecast period, particularly during the 2024 period and the beginning of 2025," it said. 

The hike to 5.25% in the Bank of England key rate suggests that UK banks will increase their mortgage interest rates to more than 6%. 

However, economists have said that, although tracker mortgage households will be immediately affected, a large number of households in Britain with long-term fixed loans means that they will not face refinancing their loans at much higher rates this year. The Bank of England holding rates higher for longer would nonetheless catch many households in later years.