(Bloomberg) -- UK living standards will remain flat this year, according to the Bank of England, rather than sliding as previously expected.

In a relief for cash-strapped households, the central bank said lower inflation and increased government help with energy bills announced in last week’s budget could help support real disposable incomes.

The judgment will come as a relief to Prime Minister Rishi Sunak, who has vowed to boost growth in an effort to increase prosperity and keep a lid on public borrowing. Signs of sticky inflation and weak consumer sentiment were making his task increasingly tricky.

In early February, the rate-setting Monetary Policy Committee had predicted a 1.3% fall in real incomes in the year to mid-2023, as rising wages failed to keep up with red-hot inflation.

But on Thursday, as it announced another 25 basis-point hike in the base rate to 4.25%, the MPC said incomes could “remain broadly flat in the near term, rather than falling significantly.”

Policymakers attributed this to a tight labor market – the BOE now expects unemployment to remain flat in the second quarter of 2023 rather than rising – and an extended government Energy Price Guarantee which will cap household bills at £2,500 ($3,070), minutes of their latest meeting show.

Strength in the labor market was also reported by the BOE’s network of agents, who communicate with businesses around the country.

In their latest report, also published on Thursday, the agents said firms expected to “keep headcount stable” in most cases or to reduce hours if demand fell, rather than letting staff go. 

That’s a response to the hiring difficulties many of them have faced since the pandemic.

Seeking Value

Stability in incomes would be welcomed by households and retailers alike. BOE agents said shops were seeing “solid demand for lower-priced goods” while customers were “switching down to the discount chains.”

Clothing retailers were “having increasingly to resort to discounting,” the agents added, while demand for durable goods such as furniture and household appliances was “weak.”

But consumers and markets may remain skeptical about the Bank’s forecasts of lower inflation. The latest CPI reading for February, published this week, hit 10.4% at a time when economists widely expected inflation to fall into the single digits for the first time since last August.

Consumer confidence, as measured by data firm GfK, rose in February but was still well below historic trend levels.

The BOE last month expected inflation of 8.5% in the second quarter of 2023, but said in the latest minutes that it was now forecasting “a lower rate than had been anticipated.”

Energy Support

This was “due largely to developments in administered energy prices,” it said, as the Energy Price Guarantee will now be extended for a further three months until July.

The extension brings down the second quarter’s inflation forecast by one percentage point, all else equal, the Bank said. It added that other measures announced in the budget, such as the freezing of fuel duty, “had contributed a further one-third percentage points of downside news to the inflation forecast, from April.”

Falling household income has also been weighing on the manufacturing and construction sectors, as demand for goods has slipped and activity in the housing market has slowed.

The Bank’s agents reported that demand for cheaper products was weighing on manufacturers’ revenues, while larger house builders were slowing build rates “in response to weaker demand.”

But in a boost for Chancellor Jeremy Hunt, who last week announced further tax reliefs on business investment in an effort to encourage productivity, the agents said investment intentions had improved.

Businesses were motivated “by a desire to increase automation in light of high labor costs,” the Bank said, while digitization was high on the agenda “to improve operational efficiency and competitiveness.”

©2023 Bloomberg L.P.