Concerns of Stagflation Raised by the Bank of England (BOE)

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] The Nasdaq, which surged more than 3% immediately after the U.S. Federal Open Market Committee (FOMC) meeting, fell nearly 5% the next day. The main reason for the extreme volatility in the U.S. stock market is analyzed to be the Bank of England (BOE) monetary policy meeting.

Park Kwang-nam, a researcher at Mirae Asset Securities, stated on the 8th, "Although the BOE decided on a 25bp rate hike in the May monetary policy meeting in line with market expectations, the market seemed more surprised by the inflation outlook than the rate hike."

The BOE forecasted that the CPI would rise to around 10% until it peaked in the fourth quarter, exceeding 9% in the second quarter of 2022. It also downgraded the GDP growth rate, predicting a contraction in the first quarter of 2023. In this environment of high inflation and increased economic uncertainty, three minority members advocated for a 50bp rate hike. However, as the majority supported a 25bp hike due to recession concerns, confidence in whether the central bank could achieve both inflation control and a soft economic landing was shaken, according to Park.

Park explained, "If inflationary pressures exceeding market expectations persist, there is a fear of having to forcibly raise rates despite the economy entering a recession phase, which rekindles concerns about stagflation."

Despite Fed Chair Powell’s positive outlook on the possibility of an inflation peak and the economy at the May FOMC meeting the previous day, investor sentiment froze again within a day due to the BOE event.

Park emphasized that it is necessary to wait and see whether the actual situation has worsened, as reflected in the stock market’s reaction.

He pointed out, "While rate hikes are a burden for financial markets, the demand reduction caused by rate hikes will certainly help suppress inflation. Recently, the 10-year government bond yields in the UK and Germany have risen to their highest levels in 7 to 8 years, respectively."

On the other hand, expected inflation has plateaued or declined since its sharp rise in February this year.

Park assessed, "Markets with increased uncertainty want more concrete evidence of inflation easing, such as the end of the Russia-Ukraine war and the cessation of China’s zero-COVID policy, but we should note that some indicators are showing changes. Rather than anticipating extreme situations, like the moon waning after it is full, this is a time that requires a bit more patience."

This content was produced with the assistance of AI translation services.