Stagflationary UK economy limits Bank of England's ability to provide monetary stimulus

The PMIs of business activity suggested a loss of momentum in the UK economy. Both the services and manufacturing indices fell well short of expectations, and while we are seeing modest growth in the former, the contraction in the latter is accelerating. Gilt yields continue to hover near multi decade highs, as markets remain wary of the willingness and ability of the Labour government to close the fiscal gap.

Further tax hikes at November’s Autumn Budget appear increasingly on the cards. The main support for sterling comes from the highest interest rates in the G10, but even here the story is not all positive: this reflects the clear stagflationary state of the UK economy, which limits the ability of the Bank of England to provide monetary stimulus without spooking the bond market. We continue to see no further cuts from the MPC in 2025.