Britain faces a new era of stagflation in the wake of Rachel Reeves’s disastrous Budget, Bank of England forecasts suggested yesterday.
A hundred days on from the Budget, the Bank slashed its prediction for UK growth this year by half, to just 0.75 per cent.
And it warned that cost-of-living pressures are on the rise again, with inflation set to climb to 3.7 per cent this year as energy bills put more strain on household finances.
That dismal combination will add to fears of ‘stagflation’, when the economy stagnates even as inflation pressures intensify. It is a phenomenon that ravaged Britain in the 1970s on a much larger scale, when inflation topped 20 per cent while the economy shrank.
There was some relief for households yesterday as the Bank’s rate-setters voted by a 7-2 majority to cut interest rates from 4.75 per cent to 4.5 per cent, the lowest level since June 2023.
Two officials wanted to go even further and cut rates by half a per cent in a bid to provide a quicker boost to the economy amid the darkening outlook.
Without directly criticising the Chancellor, the Bank said growth ‘had been weaker than expected… and indicators of business and consumer confidence had declined’.
The pound, meanwhile, fell by as much as a cent and a half against the dollar and also dropped sharply against the euro.
Rachel Reeves’ autumn Budget has ushered in an era of stagflation and rising inflation, Bank of England forecasts suggest
The Bank acknowledged that growth ‘had been weaker than expected… and indicators of business and consumer confidence had declined’
Tory business spokesman Andrew Griffith said: ‘Today’s forecasts from the Bank of England are a savage indictment of the 100 days since Labour’s disastrous Budget. Our high streets and businesses are bleeding due to Labour’s choices, but Rachel doesn’t want to know or isn’t listening.’
Julian Jessop, economics fellow at the Institute of Economic Affairs, said: ‘It is hard to see the Bank’s new forecasts as anything other than a damning assessment of the fallout from the Budget.
‘Other major economies in Europe have also stalled again, notably Germany, France and Italy, but the turnaround has been much sharper in the UK.
‘The Bank has been forced to cut [interest rates] because the UK economy is crashing.’
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: ‘The risks of stagflation are stark. Inflation remains above the Bank’s 2 per cent target and price pressures are piling up, but the economy is stagnating, and business confidence has taken a knock.’
The GDP forecast downgrade is the latest blow to Ms Reeves’s flailing growth plan – and threatens to add to her difficulties in balancing the books. If the Office for Budget Responsibility also cuts its growth forecast next month, the Chancellor’s public finance ‘headroom’ will be wiped out, forcing her to look for more money via tax rises or spending cuts.
It comes after Ms Reeves’s £25 billion raid on employers’ National Insurance, plus a hike in the minimum wage, sent business confidence plummeting while threatening jobs and pushing up prices.
Last night, former Bank of England deputy governor Sir Charlie Bean, told LBC the Government’s NI hike was ‘problematic’ because of its impact on jobs and ‘the next year or two look difficult for the Government to navigate’.
Bank governor Andrew Bailey said: ‘We live in an uncertain world and the road ahead will have bumps on it.’
Conservative business spokesman Andrew Griffith said the Bank’s forecasts were a ‘savage indictment’ of the days since Labour’s Budget
BoE governor Andrew Bailey (pictured) said we are living in an ‘uncertain’ world and that there would be ‘bumps’ on the road ahead
He added that business and consumer confidence ‘have deteriorated over recent months’, with households ‘more price-conscious and holding back on spending’.
Mr Bailey steered clear of directly blaming the Budget for the Bank’s growth downgrade and said he was supportive of the Chancellor’s growth plan.
But he said any benefits would ‘take time to come through’.
Responding to the Bank’s rate cut, Ms Reeves said: ‘This is welcome news. However, I am still not satisfied with the growth rate. Our promise is to go further and faster to kick-start economic growth to put more money in working people’s pockets.’
The economy was enjoying the strongest growth in the G7 group of advanced nations in the first half of 2024 before Labour came to power. Ms Reeves says she was left with a dire economic legacy – a claim that has been widely derided by experts.
Sir Keir Starmer defended the Government’s record as the growth outlook was cut, telling Sky News: ‘We were never going to turn around the economy in just six or seven months.’
But Andrew Sentance, a former Bank of England official, said: ‘The Bank of England forecast is dire news for the Government. Higher inflation and worse growth. The autumn Budget has made things worse.’
