BOE in a worse predicament than ECB


Despite soaring inflation driven by the energy crisis and supply chain issues, the Bank of England has maintained its existing policy.

The BOE held rates unchanged on Thursday just as the ECB and the Fed did recently, though the worst inflationary upsurge in a generation still looks gloomy.

High inflation will dog the world economy next year, with three-quarters of over 200 economists polled by Reuters saying the main risk is that it turns out higher than they forecast.

The survey followed a warning from Christine Lagarde warning that “even having a discussion on a cut is totally, totally premature.” Jerome Powell also said rate cuts were not on radar.

The ECB paused an unprecedented hiking cycle in which its main rate has risen to a record 4%, from below 0% in July 2022, at its policy meeting last week.

Governing Council member Boris Vujcic said “we have finished with the process of raising interest rates for now.” He expected inflation to hit the target by 2025.

But that was not an assurance that the hiking cycle has ended. Likewise, the BOE did not rule out the option of another rise if there is evidence of more price pressures.

Worse inflation

A bright spot is that inflation in the eurozone fell more sharply than expected to 2.9% in October, down from 4.3% the previous month. That was the slowest level in more than 2 years.

The core inflation remained above 4%. Mark Wall, chief European economist at Deutsche Bank Research, said that the ECB “needs to see wage inflation slowing and this could take a further six months.”

Some of the biggest money managers in Europe warned that the region is particularly exposed to rising prices if the crisis in the Middle East escalates as a net energy importer.

Disruptions to key shipping routes and extreme weather wreaking havoc on the supply of food staples are adding to the factors that could keep European inflation prints hot.


The UK has faced with a worse situation with evident signs of stagflation. The CPI rate was 6.7% in the year to September, unchanged from August, due to rising fuel costs.

Its headline inflation is expected to remain higher this year and next than in many of the country’s biggest trading partners including the US and the eurozone.

The country has been relying more heavily on natural gas for heating and electricity generation than its European neighbours over the last few decades, which is evident in its existing energy crisis.

So British are more susceptible to another bout of energy inflation as Russia-Ukraine war is rumbling on and Iran is ferociously threatening Israel to stop retaliation against Hamas.

Not only this, but trade barriers and impeding labour flows stemming from the Brexit have gunged up supply chains between the UK and the Continent, raising broad-based cost pressures. 

Worse economy

The eurozone economy risks falling into recession later this year after official data showed that output shrank slightly in the third quarter.

GDP across the 20 countries that use the euro fell 0.1% following a rise of only 0.2% the previous quarter. The bloc’s manufacturing and services sectors has also been on a downward trajectory.

BNP Chief Executive Officer Jean-Laurent Bonnafe said the European Central Bank shouldn’t wait long to start easing monetary policy in order to protect the euro-area economy.

The economy will “remain sluggish” whether or not the eurozone suffers a technical recession, said Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics.

Growth forecasts

2023 2024 2025
UK 0.50% 0% 0.25%
Eurozone 0.70% 1.00% 1.50%

Even so, the UK economic growth will fall further behind the eurozone next year, according to a survey of economists by Bloomberg earlier this year. That will do little to support PM Rishi Sunak’s bid to win the next election.

German’s stagnation and Italy’s fiscal challenge are particularly worrying for the eurozone. The risk premium the Italian government pays over German bonds dropped below 200 bps in Sep, the highest level in months.

On the other hand, the eurozone is well positioned to be benefiting from increasing exports driven by demand in the world’s second largest economy.

China’s economy showed signs of emerging from a soft patch in the third quarter. It is anticipated to make more policy moves to boost growth while refraining from massive stimulus.

The promised growth of non-EU traderelations

Meanwhile, a UK-US free trade deal in discussion will unlikely offset the Brexit’s fallout. Corporate insolvencies in England and Wales climbed to their highest level since the global financial crisis in the six months to September.

A trickier task is lying ahead of the BOE to balance between price control and economic stability. In this sense sterling may lose some ground against the euro heading into 2024.

Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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