Bank of England Cuts Interest Rates to 4.5% Amid Growing Concerns Over Stagflation and Economic Slowdown

The Bank of England (BoE) has cut interest rates by a quarter point to 4.5%, raising concerns that stagflation is becoming a reality, warns deVere Group CEO Nigel Green.

The UK’s central bank announced its third rate cut in just over six months, reflecting growing economic challenges.

“This decision highlights serious headwinds for the UK economy,” Green stated. “Lower borrowing costs may provide short-term relief, but weak growth and persistent inflation remain major concerns. Investors must stay vigilant.”

The BoE’s Monetary Policy Committee (MPC) faced a tough dilemma as the UK economy showed signs of stagnation, with minimal growth recorded in the final quarter of 2024. Business confidence has declined, job cuts are increasing, and wage pressures continue, while inflation risks loom large.

Consumer prices increased by 2.5% annually in December, close to the BoE’s target but still higher than expected. Services inflation, a critical gauge of price pressures, remains elevated at 4.4%, while energy costs are set to rise in the coming months.

“Compounding the problem, the government’s decision to increase employer national insurance contributions and sharply raise the national minimum wage is adding to labour costs, which could translate into higher consumer prices.”

A resurgence in inflation would limit the central bank’s ability to continue cutting rates, further straining an already fragile economy.

Nigel Green continues: “We are seeing clear evidence of stagflation risks materialising. Growth is stagnating, yet inflationary pressures persist.

“This is one of the most challenging economic environments for investors, as traditional strategies that perform well in either inflationary or recessionary conditions may struggle. Now is the time for strategic positioning.”

Global factors further complicate the outlook. The US Federal Reserve has opted to keep rates steady, while the European Central Bank and Bank of Canada have moved ahead with cuts.

However, a global trade war looms large following the latest wave of tariffs imposed by US President Donald Trump on key trading partners.

“For investors, this is not a time for complacency,” says Green. “We’re advising our clients to take decisive action. Diversification is critical, with a focus on assets that can weather both inflation and economic downturns.

“This includes defensive stocks, inflation-protected securities, and select emerging market opportunities that stand to benefit from shifting trade dynamics.”

The bond market reaction to the BoE’s decision will also be closely monitored. A recent sell-off in UK gilts raised concerns about the government’s fiscal headroom, particularly as Chancellor Rachel Reeves prepares for the Office for Budget Responsibility’s forecasts in March.

Higher government borrowing costs could further constrain economic growth, adding another layer of complexity to the investment landscape.

Stagflationary periods are rare but highly disruptive. Those who take action now—rebalancing portfolios, identifying opportunities in alternative assets, and hedging against inflation—will be in a stronger position to protect and grow their wealth.

“The latest rate cut may provide temporary relief, but it doesn’t resolve the deeper economic challenges facing the UK. The risks of stagflation are real and growing.”