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Consumer confidence hits two-year high as inflation worries ease

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The prospects of interest rate cuts by the Bank of England and of further falls in inflation over the coming year have lifted consumer confidence to its highest point in two years, a closely watched survey shows.

The consumer confidence index published by GfK, the market research company, which is now in its 50th year, edged up to -19 points in January from -22 in the previous month.

Improved optimism in household finances over the next 12 months dragged the overall index higher. GfK’s personal finance expectations index was flat in January, the first time it has not been in negative territory in two years.

Joe Staton, client strategy director at GfK, said that “consumer confidence has started the year well”, adding that “despite the cost of living crisis still affecting many households across the UK, consumers appear to be encouraged by the positive news about falling inflation”.

The rate of prices growth in the economy has fallen more quickly than expected to 4 per cent, raising hopes that the Bank will lower its base interest rate from its present level of 5.25 per cent, a 15-year high, several times in 2024.

Andrew Bailey, governor of the Bank, and the ratesetting monetary policy committee are expected to keep the base rate unchanged at their meeting next Thursday. However, financial markets think they could begin loosening monetary policy as soon as May.

Mortgage rates have been falling since November as financial markets priced in a round of rate cuts by the central bank, improving consumers’ outlook for the finances over the coming year.

High inflation and a rapid increase in interest rates to tame it have held back the economy for the past two years, with growth across 2023 expected to be a sluggish 0.5 per cent.

However, these constraining factors are set to partly unwind over the next 12 months, sparking hopes that the country will avoid a recession, boosting consumer confidence.

Separate PMI figures released this week revealed that the private sector economy had expanded at the fastest pace in seven months. Next week the Bank is likely to upwardly revise its forecasts for the economy.

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