The UK avoided falling into recession at the end of last year, according to the Bank of England, and faces a shorter and shallower recession than previously forecast.

The economy is now expected to have eked out growth of 0.1pc in the final three months of 2022, the Bank said, compared with a previous prediction for a slight fall.

The Bank now sees Britain facing a shorter and shallower recession than the one suffered during the 1990s, with five straight quarters of falling output that will leave the economy 1pc smaller over the next year. Officials at the central bank said the Government’s energy price cap would help to “limit the squeeze” on household spending.

Staff shortages mean companies are more likely to keep workers on their payrolls than previously expected – with around 400,000 fewer people now forecast to lose their jobs during the downturn. Bosses were likely to “reduce staff hours or shifts, before actively reducing headcount”, the Bank predicted.

Inflation is also expected to fall sharply this year, dropping from 11.1pc last October to less than 4pc by the end of 2023 and below the Bank’s 2pc target by the first half of 2024.

However, the Bank’s prediction that the economy will shrink by 0.5pc this year and a further 0.25pc in 2024 is still more gloomy than the International Monetary Fund’s forecast of a recession in 2023 and slight growth next year. The UK economy is still expected to remain smaller than its pre-pandemic size by the middle of this decade.

The Bank also revised down the economy’s growth potential for the next few years, signalling that shocks from the pandemic, Brexit and still-high energy costs would leave the economy with less room to grow. This suggests policymakers will need to keep interest rates higher for longer in order to keep a lid on inflation.

The changes to the outlook came as policymakers raised interest rates by 0.5 percentage points to 4pc and signalled rates were nearing a peak.

Officials voted by a majority of 7-2 to increase the Bank’s base rate, which is used by high street lenders as a reference point for thousands of savings and mortgage products. Thursday’s rise is the tenth straight increase and takes the interest rate to its highest level since 2008.

Members of the Monetary Policy Committee (MPC) suggested that the period of successive rate rises that began in December 2021 was coming to a close. Two members of the MPC – Swati Dhingra and Silvana Tenreyro – voted to keep rates on hold.

Officials stated that further increases would be dependent on how many people continued to demand big pay rises, and how that fed into price increases. They said further tightening would be required if “there were to be evidence of more persistent pressures”.

The Bank suggested it was largely ignoring its forecast of a sharp fall in inflation this year when deciding rate policy because it was more important to ward off the risk that “domestic wage and price pressures remain elevated”.

The Bank of England also cast doubt over the Government’s drive to get more people back into work, suggesting that the workforce may end up permanently smaller because of the pandemic.

It said hundreds of thousands of people had stopped looking for work during the pandemic as a result of long-term illness or early retirement.

“Many of the people who have left the labour force appear unlikely to return soon” because most do not want a job, it said in its latest Monetary Policy Report.

Some economists predict that more people will start looking for work again as the cost of living starts to bite. However, the Bank said: “So far, Agents have identified little sign of people returning to the labour market due to cost of living concerns.”

The Bank said there was growing evidence of falling house prices. It noted that demand for rental properties continued to outstrip supply as “the number of landlords choosing to exit the market increased”.

A Bank survey said landlords blamed “a combination of factors including tax and regulation, higher maintenance and borrowing costs” that was making it unsustainable to continue. It also suggested that some landlords were unable to increase rents in line with higher interest payments, with many reporting “an inability to recoup increased costs in rents.”