Stagflation: The Bank of England's greatest threat

Just the other day I caught myself idly perusing classic car websites for ads about Triumph Stags. As a man of a certain age, I have started looking fondly back to an era of British motor manufacturing that was quite frankly awful.

But somehow I have fallen into thinking this was a golden age when cars required biceps like Popeye to steer and reliability had not yet been invented.

Remember the 1970's? Flares, big collars and stagflation. Low growth, rising unemployment and soaring prices. Just like the old Stag, we had the looks, but when you delved under the bonnet/hood it was clear not everything was healthy. The Stag's V8 was slow and poorly designed and it regularly overheated.

A bit like our very unbalanced UK economy: productivity is poor, debt too high and more recently the weak pound is stoking inflationary pressures.

The 1970's brought us David Bowie and Led Zeppelin - it was a decade not without its charms. But, let's face it, the economy wasn't one of them.
Jay Dickman | Getty Images
The 1970's brought us David Bowie and Led Zeppelin - it was a decade not without its charms. But, let's face it, the economy wasn't one of them.

"The Retail Prices Index will hit 5 percent next year and, at the same time, triggering Article 50 at the end of March will hurt growth," said Nick Gartside, International Chief Investment Officer for Fixed Income at JPMorgan Asset Management.

He believes consumer and business confidence will be wracked with uncertainty by every twist and turn in negotiations. The harder the Brexit, the weaker the growth path and the flabbier the pound will look.

"The Bank of England will be forced to cut rates in the face of higher inflation as it focuses on improving growth whilst sacrificing its inflation targets,' Gartside said ahead of the Bank's announcement Thursday.

In its statement, the BoE pulled on the handbrake. Instead of promising further rate cuts, the Bank says that commitment has "expired."

And, in a nod to the impact of weaker sterling on inflation, it has made clear it is keeping a close eye on prices and could lift rates if necessary. The new inflation forecast sees the consumer price index above 2 percent next year. That is the key takeaway from this meeting - the shift in inflation expectations that has lifted sterling.

Acknowledging growth will be higher than previous forecasts the bank has said business investment is less "soft" than expected.

But this is not a time for complacency, as the High Court decision on who triggers article 50 reveals. The road to Brexit is paved with both political and economic surprises or potential grey swans.

Today's bank forecasts show the U.K. economy in a better light, but its statement is littered with warnings. And clearly the process of negotiating Brexit could raise investment-crushing uncertainty.

The 1970's brought us David Bowie, Led Zeppelin and the Rolling Stones - it was a decade not without its charms. But, let's face it, the economy wasn't one of them and with some rare exceptions nor was British car making.

Before I lay out hard cash on that Triumph Stag I might just have a look at Porsches of a more recent vintage. Like they say, nostalgia ain't what it used to be.

A fact Mr Carney no doubt understands, which is why in spite of the brickbats thrown at him about talking down the economy, it's better the bank is alert to stagflationary risks - which is the sub-text of today's statement. After all, the 1970's also brought us platform shoes and the Morris Marina - need I say more!

Geoff Cutmore is co-anchor for CNBC's flagship programme Squawk Box in EMEA. You can follow Geoff on Twitter @GeoffCutmore.

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