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Investing.com -- The Bank of England’s (BoE) cautious strategy in addressing the UK’s economic slowdown could pave the way for a long period of stagnation, according to Nigel Green, CEO of the global financial advisory firm, deVere Group.
The Monetary Policy Committee (MPC) of the BoE voted 7-2 to reduce rates by a mere 25 basis points to 4.5%, despite halving its growth forecast for 2025. Two members who disagreed with the decision advocated for more substantial cuts. However, the majority, troubled by inflation concerns, chose a less impactful middle ground, Green explained.
Green labeled this a policy failure, stating that the BoE has found itself in a predicament where it’s too apprehensive to significantly cut rates due to ongoing inflation worries. At the same time, it recognizes evident signs that the economy is slowing down. Green argued that by trying to address both issues, the BoE accomplishes neither, leading to a lengthy period of stagflation.
The BoE staff now predicts that the economy will only grow by a mere 0.75% this year, a sharp decrease from the previous forecast of 1.5%. This significant downgrade highlights the ongoing economic damage.
Additionally, the UK is facing a £40bn tax increase, which could further undermine consumer and business confidence.
Green argues that this was a crucial moment for decisive action to stimulate growth and provide businesses and households with the much-needed respite. Instead, the MPC’s tepid response could extend the economic hardship. Green warns that the UK is heading directly towards a period of stagflation, where growth halts while inflation remains high.
The two MPC members who advocated for a larger 50 basis points cut understood the gravity of the situation. However, their calls were overshadowed by a committee hesitant to make bold moves.
Green expressed that this lukewarm rate cut will do little to bolster market confidence. He advised investors to prepare for a period of lower growth and continuous inflationary pressures. He suggested that those who proactively hedge against these risks and seize opportunities in inflation-resistant assets will be the ones to prosper.
The BoE faces a significant challenge in the coming months. If it persists with its unclear and indecisive policy approach, the UK economy could be doomed to years of stagnation, Green warned.
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