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UK Stuck in Stagflation ‘Danger Zone’ as Pound and Gilts Set to Plunge


Yes, it’s bringing back those awful memories of Black Wednesday, only they can’t blame George Soros for this one.

It’s a familiar story: by hiding behind one crisis after another, the government has been able to shift the blame for its own disastrous policies on supposed acts of god (or acts of Putin), like Covid-19, or Russia’s military intervention in Ukraine. How convenient.

The problem is, in each of those cases it was government policy which destablised the economy – either through ill-conceived lockdowns, reckless QE (money printing) for ineffectual ‘Covid relief,’ a hamfisted Brexit debacle, or fruitless and fanciful ‘green’ policies, and of course, the suicidal economic sanctions against Russia. Yes, government did all of that themselves.

Will they ever be held to account?

Only this thin hall of mirrors – buttressed by a supine mainstream media, may shatter… 

Bloomberg reports…

The UK is fast becoming the epicenter of the global stagflation crisis, as the Bank of England’s policy-tightening campaign and the soaring cost of living put the world’s fifth-biggest economy on the verge of recession.

It’s about to get even worse, according to a clear majority of market participants in the latest MLIV Pulse survey.

More than two thirds of 191 respondents see the currency tumbling to $1.15, a 6% decline from current levels to lows unseen even in the post-Brexit chaos. Meanwhile a similar proportion expect 10-year gilt yields to climb to 3%. The 10-year Gilt yield was up about 5 basis points at 1.79% as of 8:12 a.m. New York time. The pound was little changed against the dollar at $1.22.

The gloomy outlook threatens to hamstring policy makers in their bid to combat the economic downturn, while heaping fresh pain onto consumers and businesses already reeling from the fastest inflation in three decades.

While few countries have been left unscathed by the pandemic and its inflationary aftermath, the UK’s decision to leave the European Union has made it more vulnerable, say 80% of MLIV readers.

As the central bank is forced to tighten policy aggressively, Pulse respondents see 10-year yields gapping higher. All that risks creating a historic cashflow squeeze for British borrowers, just as wavering consumer confidence causes a slowdown in spending.

A 6% decline in the pound on a trade-weighted basis in the current quarter would likely lift inflation 0.6 percentage point higher than otherwise in the quarters ahead, according to Bloomberg Economics’ SHOK forecasting tool.

“We’re getting into a more stagflationary environment, where growth is expected to slow sharply but inflation pressures to remain elevated, keeping pressure on the Bank of England to tighten into the slowdown,” said Lee Hardman, a currency strategist at MUFG in London. “That’s a negative mix for the currency.”

UK households are facing the second-worst year on record for real disposable income, according to BOE data going back to 1964.

(…) Meanwhile, many of the much-touted Brexit benefits have yet to emerge. Trade deals have done little to replace the seamless exchange of goods and services the UK enjoyed with the world’s largest trading bloc. The City of London, which enjoyed more than three decades of near unbroken growth as Europe’s financial hub, must now resort to workarounds to maintain access to the EU.

The costs of Brexit faded into the background when the pandemic hit. A huge wave of government money staved off an immediate reckoning, but this year as the bill for Brexit and Covid starts to emerge the BOE faces a stark balancing act. The monetary authority issued the most gloomy outlook of any major central bank this month, warning Britons to brace for a prolonged period of stagnation or even recession…

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