UK inflation, which sits close to a 40-year peak, was expected to continue to decline “gradually” in the first half of 2023 but pressures persist.
“The squeeze on real incomes from high energy prices and the path of interest rates continue to weigh on demand,” Bailey said.
“Economic output is therefore expected to fall slightly throughout 2023 and into 2024.
“This is nevertheless a much shallower decline than expected” in November, the governor added.
The BoE expects gross domestic product to shrink 0.5 per cent this year and by 0.25 per cent next.
That compared with its prior forecasts for GDP contractions of 1.5 per cent and 1 per cent, respectively.
Central banks across the world are seeking to cool high energy and food prices, fuelled by Russia’s invasion of Ukraine one year ago.
Thursday’s announcement will likely worsen Britain’s cost-of-living crisis because commercial lenders will now ramp up their own interest rates on credit cards, mortgages and other loans.
That will further squeeze cash-strapped Britons who are buckling under rampant consumer prices alongside rising household bills and transport costs.
Britain was gripped by strikes this week as public and private sector workers protest over pay that has failed to keep pace with inflation.
Half a million people stopped work on Wednesday, leaving transport networks paralysed and thousands of classrooms empty in the country’s largest walkout in more than a decade.
UK inflation slowed to 10.5 percent in December, but this is more than five times the BoE’s official target-level of 2 per cent.
The BoE began to tighten monetary policy in December 2021, when its rate stood at a record-low 0.1 per cent.
The surge in rates over the past 14 months has been a big boost for those with enough spare cash to save with financial institutions.