Qatar National Bank (QNB) suggested that the Bank of England will maintain a cautious, data-based stance, while keeping monetary policy sufficiently restrictive to return inflation to the target rate without unnecessarily stifling the fragile recovery, indicating that the British government faces a challenge in balancing between economic growth and containing inflation.
Qatar National Bank explained, in its weekly report, that the British government’s upcoming decisions during the month of September will be carefully monitored to determine how to balance these intertwined risks. Containing stagflation pressures will depend not only on the decisions of the Bank of England, but also on the consistency of the broader policy framework that will be adopted by Andy Burnham, the British Prime Minister, and John Healey, the Treasury Secretary, as the new government’s ability to reassure the markets about its financial discipline, while continuing to strive to achieve its ambitions related to growth and the new economic model, will be a decisive factor.
The report pointed out the difficult conditions faced by Andy Burnham, who has been in office since last July, in light of difficult economic conditions. During the second half of 2026, the United Kingdom has been dealing with a complex mix of weak growth and high inflation above the target level, which are features that characterize a stagflationary environment. The Prime Minister and Treasury Secretary have pledged to adopt a “new economic model” that focuses on investment and industrial renewal.
The report discussed the inflation and growth pressures facing the new Prime Minister and his Treasury Secretary, and whether the interaction between monetary and fiscal policies will lead to containing the risks of stagflation based on several main factors, including that the United Kingdom economy is witnessing clear risks associated with stagflation, as economic growth is considered barely in the positive zone, while consumer price inflation remains higher than the Bank of England’s target rate of 2 percent.
The report pointed out that the British economy is facing difficulty in gaining momentum, as it has grown by about 1 percent in each of the past two years, with a similar or weaker pace expected in 2026. This slowdown is due to the restriction of consumer spending due to higher taxes and the freezing of tax bracket limits, rising global energy costs, weak corporate investment, and the persistence of the delayed effects of previous interest rate increases.
Qatar National Bank (QNB) considered that labor market indicators have begun to lose some momentum, with increasing caution in hiring processes, and overall consumer price inflation reached its peak earlier in the year, when the global energy price shock pushed costs to rise. However, even with the decline in energy price pressures, domestic inflation remains characterized by a large degree of stability, at a time when the Office of National Statistics indicates the continued risks resulting from domestic wage growth and corporate pricing strategies that adapt to previous waves of rising costs.
In its weekly report, the Bank addressed monetary policy in the United Kingdom, which is managed independently of the government, noting that the Bank of England has a mandate that requires achieving price stability while supporting the broader economy. The Bank of England currently finds itself in the middle of a potential stagflation dilemma, as lowering interest rates too quickly may reignite price pressures and inflation, while keeping them high for a long period may deepen the state of recession and possibly push the economy toward deflation.
The report indicated that the Bank of England followed a “gradual and cautious” approach, keeping monetary policy limited to a limited degree at 3.75 percent, balancing the overlapping risks associated with prices and economic activity, and not moving except when the evidence related to underlying inflation becomes clearer, which explains why the Monetary Policy Committee resisted calls for lowering interest rates, and why a hawkish minority of its members called for further tightening, fearing that early easing would lead to entrenchment of inflation expectations.
In its weekly report, Qatar National Bank said that the flexibility of financial policy will remain constrained by high levels of government debt and legal financial rules. Government borrowing costs in the United Kingdom are among the highest in advanced economies, with ten-year government bond yields hovering around 5 percent, while public debt is close to 100 percent of GDP.
Debt servicing costs now account for a large share of public revenues, leaving little margin for error, and financial markets have shown sensitivity to initial signals that the new government may seek greater flexibility within its fiscal rules, with long-term bond yields rising in a sign of market unease.
The report called on the new government to be credible and convincing in its anticipated financial plans to help stabilize borrowing costs and create room to support growth.