The Bank of England predicts that inflation will fall sharply next year and reach below its 2% target in two years’ time, and close to zero in three years, which will lead to lower mortgage rates.

But while some economists are warning that the UK is heading for its longest recession since records began, this good news came from the minutes from the Bank of England’s latest interest rate setting, where it was also noted that interest rates may not need to rise by as much as previously expected.

The good news from the Bank of England’s meeting is the prediction from the Bank’s Monetary Policy Committee (PC), who mentioned the UK is likely to already be in a recession, which is expected to last for two years and not as deep as originally thought.

During these two years, the UK's economic growth is expected to shrink by 1.9% in 2023 and 0.1% in 2024.

To put it in perspective, the current recession would cause less impact than the one caused by the wake of the global financial crisis in 2008, where the GDP growth contracted by 2.6% in one quarter and 7.1% in across five quarters during 2008 and 2009. During the pandemic, the UK's GDP dived by a record 19.4%.

Although this is better than originally expected, economists have also pointed out that the MPC’s forecast is based on the current market conditions.

The MPC has also commented on unemployment during its minutes, predicting that unemployment is expected to increase to 4.9% by the end of 2023 from its current 3.5%, meaning that it expects unemployment to remain reasonably low.

However, for 2024 and 2025, the MPC expects unemployment to continue to rise to 6.4%, as the economy starts to slowly come out of this recession. In contrast, this is still relatively low to the peak of the 1992 recession when unemployment reached 10.7%.

Lower unemployment news has been welcomed by the housing market, as fears of high unemployment caused alarm to industry experts, who were fearing for the worse for those who would be struggling with their mortgage payments, which could lead to repossession and in turn trigger house prices to fall.

Of course, lenders have measures in place to help people who are struggling to make their mortgage payments and look at repossession as a last resort.

But with the predictions on unemployment, interest rates and the term of the recession being lower than expected, the property industry sees this as positive news.

However, one of the major contributors to the current slowdown in the housing market is the cost of living caused by the rise in inflation. The continued rise in the cost of food, petrol and energy has made consumers more cautious and calculated when making purchases, especially big ones such as buying a new home.

Lenders are also taking the cost of living into account, raising the affordability mark, and making it more difficult to borrow what previously may have been possible.

However, the MPC expects inflation to peak at 11% at the end of the year, before a sharp fall from the middle of 2023, with the prediction that inflation will reach below 2% in two years from now and close to zero in three years’ time.

Controlling inflation is a key concern, as this will allow the MPC to reduce the Base Rate, lowering the cost of borrowing, and boost consumer confidence.

During their November meeting, the MPC also predicted that the Bank of England’s Base Rate will rise to 5.25%, much lower than originally expected. However, it has added that this prediction is based on the current market conditions and that it will act as it sees necessary in order to bring inflation below its 2% target.

In a press conference following the meeting, Bank Governor Andrew Bailey said the Bank Rate would have to go up by less than currently expected by financial markets. “Our best view of where the rate should be… is nearer the constant rate curve [3.00%] than the market rate curve [5.25%].”

Following his comment, economists have interpreted that the Bank of England’s Base Rate may peak at 4%, meaning good news for mortgage rates.