The Bank of England’s hesitant approach to tackling the UK’s economic malaise by cutting interest rates by a quarter point is setting the stage for prolonged stagnation, warned Nigel Green, CEO of financial advisory giant deVere Group.
The Monetary Policy Committee (MPC) voted 7-2 to cut rates by a modest 25 basis points to 4.5% on Thursday, in line with expectations, despite slashing its growth forecast for 2025 in half.
Two dissenting MPC members called for deeper cuts, but the majority, “paralysed by inflation fears, opted for an ineffectual middle ground,” said Green.
“This is a policy failure. The Bank of England has backed itself into a corner where it is too scared to cut rates aggressively due to lingering inflation, yet it also sees clear evidence that the economy is grinding to a halt. By trying to do both, it achieves neither — ensuring stagflation takes hold for a prolonged period.”
BoE staff now expect the British economy to expand by just 0.75% this year, down from a prior forecast of 1.5%, a brutal downgrade that underscores the damage being done.
Meanwhile, the UK faces a £40 bln tax squeeze, further choking consumer and business confidence.
“This was the moment to act decisively, to drive growth and give businesses and households the breathing room they desperately need,” the deVere CEO continued.
“Instead, the MPC has delivered a lukewarm response that could prolong economic pain. The UK is heading straight into stagflation, where growth stagnates, but inflation remains stubbornly high.”
Committee too afraid
The two MPC members who pushed for a larger 50bps cut recognise the urgency of the situation. But their voices were drowned out by a committee too afraid to move boldly.
According to Reuters, investors were surprised that Catherine Mann – previously the MPC member most opposed to rate cuts – joined Swati Dhingra to seek a bigger reduction to 4.25%.
“The result? A policy that is neither tackling inflation effectively nor supporting economic expansion.
“This half-hearted rate cut will do little to improve market confidence. Investors should be positioning now for an era of lower growth and persistent inflationary pressures. The winners will be those who take proactive steps to hedge against these risks while seizing opportunities in inflation-resistant assets,” Green said.
The Bank of England faces a critical test in the coming months.
“If it continues with its muddled, indecisive policy path, the UK economy could be condemned to years of stagnation,” he concluded.
