Why the Bank of England raises the stagflation alarm in the UK
What Bank of England Governor Andrew Bailey said about stagflation risk in the UK. The article by Daniele Meloni
Standard of living alarm. Stagflation risk. Historic shock in the decline in purchasing power. These are the worrying words used by the Governor of the Bank of England (BoE), Andrew Bailey, in his speech at the Brueghel think tank in Brussels to outline the economic situation in the United Kingdom. And there's more: another shock, the energy one, could be far worse than that of the 1970s, when the lights went out across the UK.
The Threadneedle Street alarm comes at a very sensitive time for the pockets of British taxpayers. Last week the Chancellor of the Exchequer, Rishi Sunak, presented the usual spring budget in which he tried to alleviate some of the taxes imposed on the British on fuels and National Insurance but many people think that further corrective action will be necessary. . For Bailey, inflation could reach as high as 8% this spring with the possibility of it reaching 10% by the end of the year. New increases are expected in gas and electricity bills for users, driven by the war in Ukraine and the impact of the global cost of energy.
The BoE responded to this real emergency by raising interest rates by a quarter of a point, bringing the rate from 0.50 to 0.75% after the meeting of the Bank's Economic Policy Committee in early March. The expectation, said Bailey from Brussels, is for both growth and demand to decline. A first evidence of this forecast emerges from the surveys concerning the behavior of consumers and businesses. Analysts expect the Bank of England to hike rates to 1% in May, while financial markets indicate they could hit 2% by the end of 2022.
The stagflation warning – rising inflation and slowing growth – is serious and for Bailey represents the biggest challenge to the Bank's Policy Committee since its creation in 1997. It is not comforting to know – as the Governor himself admitted – that Europe and the United States are also facing and will face similar problems.
Last week the Office of Budget Responsibility (OBR) – an independent body that evaluates the performance of the UK economy – lowered its annual growth forecast from 6 to 3.8%, warning that the highest inflation in the last 3 decades it would affect the demand for consumer goods. Faced with this scenario, Sunak has in any case expressed the desire not to exceed public spending for the fear that abandoning fiscal responsibility will generate further inflation. With the elections in sight in less than two years (or, who knows, maybe even sooner) the Tory government finds itself a problem, that of the high cost of living, which could also lead to its downfall.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/bank-of-england-stagflazione-regno-unito/ on Tue, 29 Mar 2022 08:54:50 +0000.