The Bank of England is widely expected to cut interest rates this week, bringing the base rate down to 4.5% as the UK economy struggles with stagnation and rising uncertainty. But with inflation risks still in play and global trade tensions escalating, is this the right move—or are we heading into a stagflationary storm?

🔑 Key Factors Behind the Rate Cut
📉 UK Growth is Stalling – Data suggests zero growth in Q4 2024, falling business confidence, and increasing corporate redundancies. The BoE must act to support the economy.
📈 Inflation Pressures Remain – Headline inflation has eased to 2.5%, but services inflation remains elevated at 4.4%, and rising energy prices could push CPI back to 3% or higher in Q2.
⚠️ Labour Cost Pressures – With a higher national minimum wage and increased employer National Insurance contributions, the BoE is monitoring whether wage growth will drive further inflation.
🌍 Global Trade Uncertainty – The economic outlook has been clouded by President Trump’s new tariffs on Canada, Mexico, and China, adding further risks to global supply chains and inflation.

🚨 Are We Heading for Stagflation?
This rate cut comes at a time of conflicting economic signals. Weak growth and persistent inflation pressures could create a stagflationary environment, where lower rates do little to stimulate demand, while inflation remains stubbornly high.

💬 “All surveys now show growth slowing and inflation pressure rising, but differ on the severity of the moves.” – Rob Wood, Pantheon Macroeconomics

Markets currently expect three rate cuts in 2025, but if inflation rebounds, could the BoE be forced to pause—or even reverse course?

🏦 Market Reaction: What to Watch
🔹 Gilt Market Volatility – A sell-off in gilts earlier this year has already raised concerns about government borrowing costs. If investors see higher inflation risks, borrowing costs may rise further.
🔹 Monetary Policy Divergence – While the ECB and Bank of Canada have cut rates, the US Federal Reserve has held steady, with the US economy expected to outperform other G7 nations.
🔹 UK Fiscal Outlook – With the March Budget approaching, Chancellor Rachel Reeves will be watching closely, as rising government debt costs could impact fiscal policy decisions.

Sam Fleming Financial Times

📩 If your firm needs to navigate these changes, SecFin Solutions can help. Get in touch.

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