Bank of England Forecasts Challenge Chancellor's Growth Agenda

Bank of England Governor Andrew Bailey has expressed strong support for Chancellor of the Exchequer Rachel Reeves' plans to stimulate UK growth. Deputy Governor Clare Lombardelli also voiced support. However, the central bank's latest economic forecasts present a stark challenge to Reeves' agenda.

The BOE has significantly downgraded its growth outlook, predicting just 0.75% growth for this year and a shallow contraction at the end of 2022. The bank also assigns a 2-in-5 probability to the UK already being in a technical recession.

Inflation is projected to exceed expectations, peaking at 3.7% later this year, driven by rising energy prices. Wages are forecast to match inflation at 3.7% by 2025, while real post-tax income will remain stagnant in 2026 and 2027.

These forecasts underscore the challenges facing Reeves as she seeks to revitalize the UK economy. The projections indicate the significance of her infrastructure and regulatory initiatives, including Heathrow Airport's third runway, for easing fiscal pressures.

Resolution Foundation's James Smith noted the risk of stagflation, given weak growth and rising inflation. Reeves, while welcoming the bank's interest rate cut, expressed dissatisfaction with the economic forecasts.

The Office for Budget Responsibility's upcoming fiscal update on March 26 will be a crucial test for Reeves. If the OBR adopts the BOE's cautious stance on growth, she may face pressure to break fiscal rules, potentially necessitating spending cuts or tax increases.

The BOE has also highlighted productivity concerns, particularly in the public sector, suggesting the need for reforms that may not align with Labour government priorities.

The bank's forecast does not incorporate a potential trans-Atlantic trade war, which could further constrain UK growth. Inflationary pressures and uncertainty surrounding global yields also pose risks to Reeves' fiscal plans.

The BOE's cautionary outlook challenges Reeves' growth agenda, requiring decisive action to address economic weaknesses and mitigate potential risks.