A Bank of England rate-setter has warned it faces a `terrible situation' grappling with stagflation fears that have been caused by the global energy shock. The comments came as a new economic forecast from professional service company EY predicted that UK growth this year could slow to 0.3 per cent in the event of continued stalemate in the Middle East.
A Bank of England rate-setter has warned it faces a `terrible situation' grappling with stagflation fears that have been caused by the global energy shock .
Megan Greene highlighted the tough choice facing the central bank as it ponders whether to increase interest rates to combat rising inflation, even though that could further weaken growth. Markets currently expect two rate rises this year, though Greene told Bloomberg that it was `worth waiting a little while' to see how the Iran war progresses `before we make a move.
' She added: `We've now had a negative supply shock, an energy shock, and that stands to push inflation up and growth down, which is a terrible situation for a central banker to be in. ' The comments came as a new economic forecast from professional service company EY predicted that UK growth this year could slow to 0.3 per cent in the event of continued stalemate in the Middle East.
Meanwhile, Brent crude oil prices have climbed close to $104 a barrel after US President Donald Trump rejected Iran's response to America's peace proposal as `totally unacceptable'. Concerns: Bank of England official Megan Greene highlighted the tough choice facing the central bank as it ponders whether to increase interest rates to combat rising inflation And in the UK ten-year borrowing costs rose above 5 per cent, also affected by fears of political turbulence in Britain.
The war is choking off supplies of oil and gas from the Middle East, pushing up fuel, energy and food prices, and sending global growth veering off course. That threatens a `stagflation' scenario, which is the toxic combination of stagnating growth and surging inflation, and a nightmare for central bank rate-setters. RELATED ARTICLES Share this article Share HOW THIS IS MONEY CAN HELP If the energy shock is a one-off they might not need to hike rates.
But if it threatens to create a damaging spiral of `second-round' effects in which workers demand higher wages, in turn fuelling further high prices, they may feel the need to act. Greene said she believes there were already `some signs of some persistence' in inflation even before the war and that now `the risk is entirely on the up-side'.
It comes after the conflict pushed inflation up to 3.3 per cent in March and the Bank warned last month that in a worst-case scenario it could soar to 6.2 per cent. That could require it to raise rates as many as six times, to 5.25 per cent by the start of next year.
EY's latest forecast said Britain had been on track to grow by 1.3 per cent before the war but that this was now expected to slow to 0.8 per cent. This would fall to 0.3 per cent if the conflict escalates and the critical Strait of Hormuz waterway – through which a fifth of the world's oil and gas passes – remains closed until the end of the year.
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