'Stagflation' threat puts heat on Bank of England's rate decision

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The UK energy crisis means the Bank of England is facing a ‘difficult backdrop’ against which to make its latest decision on interest rates this week, a top fund manager has warned.

The central bank’s rate-setting Monetary Policy Committee (MPC) is set to announce the results of its September meeting on Thursday but disappointing economic data and rising inflation are causing furrowed brows across the City.

The escalating energy crisis is adding to inflation worries, meaning policymakers will have even more to ponder as they try to steady the spiralling cost of living and encourage growth.

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The Bank, led by Governor Andrew Bailey, slashed interest rates to a record low of 0.1 per cent to encourage spending last year. It also restarted its £895billion money-printing programme, known as quantitative easing (QE), to inject more cash into the economy.

But over the summer, members of the nine-strong MPC began to disagree on whether QE should be cut short to cool inflation concerns. 

Bank officials have hinted a rate rise could come as soon as 2022, around a year earlier than expected.

Economists and investors are increasingly edgy. Laura Foll, a UK fund manager at Janus Henderson, told BBC Radio 4’s Today: ‘There are cost pressures from a huge range of areas, whether it’s freight, raw materials, labour shortages or – something I think I’m going to be hearing a lot more about in the future – utility bills.’

Inflation, or rises in the cost of living, climbed to 3.2 per cent in August from July’s 2 per cent, the biggest spike on record. 

And while some of this is due to falling prices in the comparison period a year ago, the worry is that prices will continue to rise.

Foll added: ‘The longer this inflation goes on, the more likely it is to become embedded because we as consumers will feel this price pressure, we will ask for it in our wage discussions and that is exactly how inflation expectations become embedded in the system. 

This is creating quite a difficult backdrop for the MPC because the economic data that we’re seeing from the UK, and in countries like the US, is decidedly mixed.’

While inflation is rising, economic output has disappointed, fuelling fears of ‘stagflation’, where the cost of living soars but the economy stagnates – considered a dangerous prospect as it is usually accompanied by fewer jobs and lower wages.

Ruth Lea, economic adviser to the Arbuthnot Banking Group, said: ‘Interest will focus on whether the MPC maintains its stance that the uplift in inflation is “transitory”, given the latest developments. We expect that it will, but clearly there are dangers that higher inflation will become embedded.’

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