Any hope of a near-term drop in interest rates appears to have been wiped out by a statement by Bank of England governor Andrew Bailey.

In a statement to a north of England news service, Bailey says the UK economy’s potential to grow is “lower than it has been in much of my working life.”

Last week the independent Office for Budget Responsibility – in a statement issued at the time of Chancellor Jeremy Hunt’s Autumn Statement – said that while it expected the UK economy to grow by 0.6 per cent this year, the outlook for the near future was not as good as previously predicted. It cut its growth outlook to 0.7 per cent in 2024 and 1.4 per cent in 2025 – down from previous forecasts of 1.8 and 2.5 per cent.

Bailey told the Chronicle Live website: “I recognise higher interest rates do have effects. They do have effects on mortgage costs, and they also have an effect on rental costs because they feed through. What I would say, to be honest, is that if we don’t get inflation down, it gets worse.”

“I’ve very much used this analogy of a game of two halves. They’re not equal but a lot of what we’re seeing at the moment, including that inflation came down a bit over two per cent, and that’s very good news, is the unwinding of these inflationary effects of these external shocks.

“I’ll make a distinction between the inflation effects and the cost of living effects because the cost of living effects are important but that’s the sort of price levels, and I recognise they’re still high. Inflation coming down stops them going higher. We’re going to see some more of that unwind effect but we’re not going to see another month, I’m afraid, where it’s going down two per cent because of that. A lot of that’s on the Ofgem methodology on energy prices.

“By the end of the first quarter next year, when a lot of that unwind will have happened, we may be a bit under four per cent but we’ll still have two per cent to go, maybe. And the rest of it has to be done by policy and monetary policy. And policy is operating in what I call a restrictive way at the moment – it is restricting the economy. The second half, from there to two, is hard work and obviously we don’t want to see any more damage.

“I’m very conscious of the position of the less well off but we do have to get it down to two per cent and that’s why I have pushed back of late against assumptions that we’re talking about cutting interest rates or we will be cutting interest in anything like the foreseeable future because it’s too soon to have that discussion.”

The Bank has raised interest rates on 14 occasions in recent times in its attempt to tackle rising prices, which have soared largely due to energy and food costs increasing in the aftermath of the Covid pandemic and Russia’s invasion of Ukraine.

Interest rates are currently at 5.25 per cent, a 15-year high.