Bank of England Governor Andrew Bailey has said that the UK’s recession is “very weak”, but signalled that inflation does not need to reach 2% before the Bank starts cutting interest rates.

Mr Bailey said that compared to recessions dating back to the 1970s, the 0.5% cumulative reduction in gross domestic product (GDP) in the third and fourth quarter was “the weakest by a long way”.

“We have a very precise definition of a recession in this country as two successive quarters of negative GDP growth,” he told the Treasury Select Committee.

An exterior shot of the Bank of England in London (Yui Mok/PA)
Mr Bailey said that the Bank of England’s Monetary Policy Committee could start cutting interest rates before inflation reaches the Bank’s target of 2% (Yui Mok/PA)

“The two successive quarters… last year, I think, cumulatively add up to minus 0.5% on GDP.

“If you look at recessions going back to the 1970s, this is the weakest by a long way because the range, I think… for those two quarters for all the previous recessions was something like 2.5% to 22% in terms of negative growth, so minus 0.5% is a very weak recession.”

Fellow Bank of England interest-rate setter Dr Ben Broadbent pointed out that other countries, including the US, define recessions in different ways.

Mr Bailey also said that the Bank’s Monetary Policy Committee (MPC) could start cutting interest rates before inflation reaches the Bank’s target of 2%. He said that the target is likely to be met sometime this spring.

He said that he wanted to see sustained progress on inflation in the services sector, pay increases and the labour market.

“We’ve seen, I think, encouraging signs on them. So, services inflation is still above 6%, there are some signs of it coming down now,” Mr Bailey said.

“I think some signs that pay is now adjusting down towards the lower headline inflation, which is what I’d expect to see.

“The quantity side of the labour market remains tight, there’s no question about that. But it’s the progress of those three things.

“We don’t need inflation to come back to target before we cut interest rates, I must be very clear on that, that’s not necessary.

“We’ll be looking for sustained progress on those things to reach that judgment about how long this period of restrictive policy needs to be.”

Swati Dhingra, a fellow member of the MPC, said that if the Bank keeps interest rates high “for longer” that could weigh on some parts of the economy.

“Despite the disinflation at play, and despite the fact that there has been some real wage recovery, we’re still seeing consumption very weak and very different from some of the other advanced economies where there has been a bounce back from the pre-pandemic levels,” she said.

“Here, we aren’t seeing that, even after January’s retail sales, unfortunately, (retail sales are) about 2.1% lower.

“I think that suggests to me that the downside risks at this point are substantial and, therefore, if we keep monetary policy tight for longer, that would weigh even further on that sort of real relativity.”