Doha, Qatar: Qatar National Bank (QNB) expected the Bank of England (BoE) to maintain a cautious, data-dependent stance, keeping policy restrictive enough to guide inflation back to target without unnecessarily choking off a fragile recovery.
QNB noted that the UK government faces a difficult balancing act between supporting economic growth and containing inflation.
In its weekly economic commentary, QNB said the upcoming September decisions will be closely watched for how the new government balances these competing risks.
The bank said containing stagflationary pressures will depend not only on the BoE’s decisions but also on the coherence of the wider policy framework adopted by Prime Minister Andy Burnham and Chancellor John Healey.
In particular, QNB said the new government’s ability to reassure markets of its fiscal discipline while still pursuing its growth and new economic model ambitions will be critical.
QNB noted that Andy Burnham, Prime Minister of the United Kingdom since July, has inherited a difficult economic situation. The United Kingdom is navigating the second half of 2026 against a difficult combination of weak growth and above-target inflation, which are the characteristics of a stagflationary environment.
QNB said that, together with the new Chancellor, John Healey, the new Prime Minister has pledged a "new economic model" centred on investment and industrial renewal.
The report discussed the inflation and growth pressures confronting the new Prime Minister and his Chancellor, and how the interaction between monetary and fiscal policy will determine whether stagflationary risks can be mitigated.
QNB noted that the UK economy is exhibiting clear stagflationary risks, with economic growth barely in positive territory and consumer price inflation remaining above the BoE's 2% target.
QNB said the UK economy has struggled for momentum, expanding by around 1% in each of the past two years, with a similar or softer pace expected in 2026.
The bank attributed this deceleration to constrained consumer spending from high taxes and frozen tax thresholds, rising global energy costs, sluggish business investment, and the lingering lag effects of past interest rate hikes.
QNB also noted that labor market indicators have begun to cool, with hiring becoming more cautious.
QNB said headline consumer price inflation reached a peak earlier in the year, when the global energy price shock pushed costs higher. Yet even with the moderation of energy pressures, domestically generated inflation is proving quite sticky. QNB noted that the Office for National Statistics continues to highlight risks from persistent domestic wage growth and corporate pricing strategies adjusting to earlier cost spikes.
QNB said monetary policy in the UK is set independently of the government, with the BoE mandated to deliver price stability while supporting the wider economy. The bank noted that the BoE currently finds itself in the middle of a potential stagflation dilemma: cutting interest rates too quickly risks reigniting price pressures and inflation, while holding them too high for too long risks deepening the stagnation and potentially a recession.
QNB said the BoE has signaled a "gradual and careful" approach, keeping policy modestly restrictive at 3.75%, weighing competing risks to prices and economic activity, and only moving as the evidence on underlying inflation becomes clearer. The bank said this explains why the Monetary Policy Committee has resisted calls to lower rates, and why a hawkish minority of members have argued for further tightening, wary that easing prematurely could allow inflation expectations to become entrenched.
QNB said fiscal policy flexibility will remain constrained by high government debt levels and statutory fiscal rules. UK government borrowing costs are among the highest in the advanced economies, with ten-year gilt yields around 5% and public debt close to 100% of GDP.
QNB noted that debt-servicing costs now absorb a substantial share of public revenue, leaving little margin for error. The bank said financial markets have proved sensitive to early signals that the new government might seek greater flexibility within its fiscal rules, with long-dated yields rising in protest.
QNB said the new government needs to be credible and convincing with its forthcoming fiscal plans to help anchor borrowing costs and allow it to support growth. The bank noted that the policy mix and communication, in other words, matter as much as the level of interest rates.
