The Bank of England has an interest rate headache as the spectre of stagflation hangs over Britain.
Bleak figures from the Office for National Statistics yesterday showed unemployment at a four-year high of 4.7 per cent as Labour’s tax hikes cost jobs.
Borrowers will hope that the jobs bloodbath, combined with two months in a row of declining economic output, convinces the Bank to cut rates next month.
But the central bank is also grappling with surging inflation at a 17-month high of 3.6 per cent.
While a rate cut next month is expected, analysts warned it is far from certain. Charlie McCurdy, an economist at the Resolution Foundation, said: ‘The jobs data presents a clear case for lowering rates.
But higher-than-expected inflation muddies the picture. The decision next month is far from straightforward.’
Rate debate: The Bank of England is grappling with surging inflation , which has leapt to an 17-month high of 3.6%, well above the 2% target
Central banks typically raise interest rates to control inflation and cut them when it is no longer a problem and the economy needs a lift.
The Bank has cut rates four times since last August – from 5.25 per cent to 4.25 per cent – and investors now think there will be fewer cuts for the rest of this year.
Simon French, economist at Panmure Liberum, expects two, having pencilled in four.
Matthew Ryan, at global financial services firm Ebury, said: ‘Things are going from bad to worse.
‘This week’s data puts the Bank in an extremely tough spot… an August rate reduction remains on the cards.’
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