‘Stagflation’ fears as Bank of England cuts growth forecast and warns of price rises

I think most people in the UK are looking at the economy and wondering what's going on and what our prospects are. So, the announcement from the BoE, yesterday, was interesting (link here).

What is Stagflation?

Stagflation is an economic situation where stagnation (slow or no economic growth) and inflation (rising prices) occur simultaneously. This is problematic because it creates a difficult challenge for policymakers—typically, measures to reduce inflation (such as raising interest rates) can slow growth further, while measures to boost growth (such as cutting interest rates) can worsen inflation.

Key Characteristics of Stagflation:

Slow Economic Growth – The economy struggles to expand, with low or negative GDP growth.

High Inflation – The cost of goods and services continues to rise, reducing purchasing power.

High Unemployment or Weakened Labour Market – Job creation slows, wages stagnate, and people struggle to find employment.

What did the article say?

The Bank of England has halved its UK growth forecast for 2025 to 0.75%, down from 1.5%, citing weak business and consumer confidence. Despite cutting interest rates for the third time in six months to 4.5%, the Bank warned of rising inflation, squeezing household incomes and raising fears of stagflation—a mix of low growth and high inflation. Rachel Reeves faces mounting pressure as business leaders blame her increase in employer national insurance for declining confidence. The Bank expects inflation to rise to 3.7% by summer, delaying economic recovery. The MPC’s decision suggests further rate cuts, potentially easing government borrowing costs. Andrew Bailey signalled a cautious approach to future cuts, prioritising economic stability. Meanwhile, concerns over Donald Trump’s tariff policies add to global uncertainty. While Labour focuses on attracting private investment, union leaders urge public investment to drive growth. The Bank's forecasts remain cautious, warning of external economic risks.

Key Takeaways

Stagflation Fears – The UK faces weak growth and rising inflation, with a downgraded 0.75% growth forecast for 2025 and inflation expected to rise to 3.7% by summer.

Interest Rate Cuts & Economic Concerns – The Bank of England cut rates to 4.5% but warned of ongoing economic stagnation, hinting at further reductions to support recovery.

Policy & Business Confidence – Rachel Reeves faces criticism for tax hikes, while Labour’s private investment strategy is questioned. Global risks, including Trump’s tariffs, further cloud the outlook.