As the Bank of England holds interest rates, should we fear ‘stagflation’?

Low growth, rising inflation and high rates. The only thing missing, says James Moore, is high unemployment

Should “stagflation” be our word of the day? It’s the term used by the parents of proto-central bankers to scare them into eating their broccoli. It applies when you have slow or no economic growth, high inflation and high interest rates.

Sound familiar? Inflation in Britain is running ahead of expectations at 2.6 per cent and the Bank of England has just held rates at a restrictive 4.75 per cent.

But for an economy to be in the stagflation zone, there is one other requirement: high unemployment. Britain doesn’t have that right now (although it is expected to rise, thanks to Rachel Reeves’s decision to hike taxes on jobs).

Concern about the other problems might explain why the Bank of England’s committee voted the way it in deciding to hold rates even when other central banks have been cutting. Its rate-setting Monetary Policy Committee (MPC) was split six to three, with the three favouring a cut to 4.5 per cent.

I had expected Swati Dhingra to vote for a cut; the external member is the mortgage holder’s best friend, a rate dove who has consistently supported cuts. She is inevitably the one when the vote goes eight to one.

She was joined this time by Sir Dave Ramsden, one of the Bank’s three deputy governors, who has voted with her before, and also by newcomer Alan Taylor. Taylor is Reeves’ first appointment and the replacement for hawkish Jonathan Haskel, who would almost certainly have voted to hold rates.

This may shift the MPC in a slightly more dovish direction with the external hawks (Catherine Mann, Megan Greene) balanced out by two doves. It’s one to watch.

A shift could be helpful to Reeves as she grapples with the fallout from a flatlining economy, for which she will take the blame; that might not be fair, but it is in the chancellor’s job description and Labour has made some bold economic promises, including a pledge to make Britain the top performer in the G7.

The doves this time were concerned about Britain’s “weakening labour market” – although it would have to weaken a lot for Britain to qualify as being in full stagflation hell – and sluggish demand. They see further “downward pressure on demand, wages, and prices” and worry about weak global conditions. The “evolving balance of risks” warranted a cut in their view. Were I on the MPC (please, don’t laugh) I think I would have been with them.

The majority were clearly more worried by high wage settlements and other factors pushing inflation above the target, even if keeping rates high cripples the economy. There is plenty for the committee to worry about, not least Donald Trump and the tariffs he’s been threatening.

The UK economy is weak – weaker than expected – with zero growth forecast for the fourth quarter of the year. It wouldn’t take much for that zero to become a negative. A second negative quarter would put Britain officially in recession. I should stress that isn’t expected; forecasters see a pick up, and higher growth in 2025. Government spending plans announced by Reeves will provide an economic sugar rush (though this will also add to inflationary pressure).

Rates are also expected rates to fall, albeit, “gradually” in the words of Bank governor Andrew Bailey. Thursday’s six-three vote makes me more confident of a rate cut in February, with a second later in the year.

Homeowners are going to face a hard road. The most popular fixed-rate deals – those running for two or five years – are governed by long-term expectations for interest rates set by the City’s interest rate swaps market, not base rates.

The MPC’s minutes make it clear that UK (and US) rates are expected to be between 3.75 per cent and 4 per cent in three years’ time, compared to just 2 per cent in the eurozone (the European Central Bank cut to 3 per cent at its last meeting).

The age of cheap money, and ultra-cheap mortgages, is well and truly over; the Bank notes that 37 per cent of those on fixed-rate deals have not yet re-fixed their loans since rates started to rise.

So the full impact of higher rates has yet to be felt by millions of borrowers, who are set for a nasty financial shock in the new year. This matters for the economy, because their confidence will take a hit and their spending will be constrained. We’re in for a bumpy ride, and perhaps the true word of the moment is “uncertainty”.