Bank of England ‘must be honest’ on UK stagflation risk

The Bank of England needs to be honest and flag the risk of stagflation in the UK – not just “unavoidable” higher inflation – the CEO of a leading independent financial advisory and asset management organisation has warned. “The narrative coming out of the Bank of England appears to be incomplete,” said Nigel Green of deVere Group, which has $14 bln under advisement. The BoE held interest rates at 3.75% on Thursday while signalling that inflation will rise again this year due to escalating geopolitical tensions in the Middle East and surging energy prices. “The UK faces a credible risk of stagflation, and policymakers need to acknowledge and be honest about this,” warned Green. The Bank’s Monetary Policy Committee voted 8-1 to keep borrowing costs unchanged, despite inflation rising to 3.3% in March and expectations just months ago that it would fall back to the 2% target by mid-year. Since mid-2024, rates have been cut six times, and markets had anticipated further easing in 2025 before the conflict in the Middle East disrupted the outlook. Energy prices are once again at the centre of the inflation story. Higher oil and gas costs are already feeding through to households and businesses, squeezing margins and eroding real incomes. Yet the impact does not stop at inflation. “Energy-driven inflation is classic stagflation territory,” explained the deVere CEO. “It pushes prices higher while simultaneously weakening growth. Consumers spend more on essentials, businesses face rising input costs, and investment slows. You end up with an economy that’s under pressure from both sides.” The UK economy is already vulnerable. Growth has been sluggish, productivity remains weak, and households continue to feel the effects of an extended cost-of-living squeeze. A renewed inflation impulse risks compounding these pressures at precisely the wrong moment. “Growth in the UK is fragile. It doesn’t take much to tip it into stagnation,” noted Green. Policy trap “At the same time, inflation is being driven by forces outside the Bank’s control. This is exactly the combination that creates a policy trap.” Such a trap leaves central banks with limited room to manoeuvre. Raising rates to combat inflation risks choking off already weak growth. Cutting rates to support the economy risks allowing inflation to become embedded. “This is the dilemma the Bank of England is now facing. And it’s why the language matters. Downplaying a stagflation risk doesn’t change the reality. It only delays the necessary conversation about how to respond.” Markets are beginning to adjust. Expectations for aggressive rate cuts have been scaled back, and investors are reassessing the path of monetary policy in light of persistent inflation pressures. “The shift has implications across asset classes, from gilts to equities and the pound. “Investors need to be clear-eyed about what is happening,” added Green. “This is not a straightforward inflation cycle where central banks can fine-tune demand and bring prices back under control. The drivers are structural and geopolitical, and they are far harder to manage.” The post Bank of England ‘must be honest’ on UK stagflation risk appeared first on Financial Mirror.