PM holds 'crisis summit' after Bank of England warning over 'Stagflation' - and fears grow over further tax hikes

7 February 2025, 11:06 | Updated: 7 February 2025, 11:30

Keir Starmer is gathering his Cabinet for a crisis meeting as the threat of 'Stagflation' rises.

The special meeting with ministers is taking place to 'take stock' after the Bank of England halved growth forecasts for this year from 1.5 per cent to 0.75 per cent.

It was also announced on Thursday that interest rates had been cut from 4.75 per cent to 4.5 per cent.

However, the Bank of England warned that inflation had eased much more slowly than hoped.

The changes come after Chancellor Rachel Reeves confirmed major tax increases in the October Budget as well as rising energy and water costs.

There are now fears that extra tax increases or spending cuts are on the way as the government continues to fill a hole in public finances.

Economists suggested the UK is heading towards 'Stagflation', with the economy flatlining while inflation pressures continue to grow.

Read more: Bank of England cuts interest rates to lowest level since May 2023

Read more: Mental health charity calls for government help as services to take £250k hit due to NI tax hikes

Bank of England Governor Andrew Bailey has been supportive of Ms Reeves' plans but said they would "take time" to have an effect.

"Growth rate in the UK has been low since the financial crisis - addressing those questions is critical, so I very strongly agree with the Chancellor," he said.

"Structural policies take time to come through."

However, time is not on the Chancellor's side as she looks ahead to economic and fiscal forecasts from the Office for Budget Responsibility in March.

Ms Reeves said she was "still not satisfied with the growth rate" on Thursday.

The OBR forecast will give a verdict on whether she will be able to stick to her "ironclad" fiscal rules without raising taxes or slashing spending.

She will then present her spring statement in the Commons.

As the Government has said there will only be one fiscal event per year in autumn, this is expected to be an update to MPs rather than an event to set out an emergency Budget.

But the Chancellor will need to decide how to respond if the £9.9 billion of leeway she outlined in her October Budget has significantly narrowed.

A spending review, due later this year, is already expected to require departments to make efficiency savings worth 5% of their budgets.

Paul Johnson, director of the influential economics think tank the Institute for Fiscal Studies (IFS), called the Bank of England update on Thursday a "pretty pessimistic forecast".

He posted on X: "OBR is generally much more optimistic than the Bank, but if it moves in a similar direction that will spell trouble for the Chancellor."

US tariffs, even if not imposed directly on the UK, could also hit growth.

"If there were to be tariffs that contributed to a fragmentation of the world economy, that would be negative for growth for the world economy. I hope that doesn't happen, but that could happen," Bank of England Governor Mr Bailey said.

"The impacts on inflation are much more ambiguous."

Tory leader Kemi Badenoch accused Labour of "ruining the economy", adding that the situation was "worrying".

Head of money and markets at Hargreaves Lansdown Susannah Streeter said: "The risks of stagflation are stark.

"Inflation remains above the Bank's two per cent target and price pressures are piling up, but the economy is stagnating, and business confidence has taken a knock."