The Bank of England's out-of-control policies reflect looming global recession fears.
2026-03-31 15:40:03
As a long-established economic power, the UK's central bank system has long been regarded as a benchmark for global monetary policy—its independent framework centered on a 2% symmetric inflation target was once a model for stabilizing the economy and anchoring expectations.
However, under the dual pressure of geopolitical conflict and energy crisis, this advanced system has proven ineffective: the Bank of England is caught in a dilemma of out-of-control interest rates, and this is by no means an isolated case. It reflects the grim reality that the global energy crisis is difficult to control under the shadow of war, and is deeply intertwined with the shadow of economic recession.
The Bank of England's predicament stems from the sharp divergence between its inflation target and actual inflation. In her letter of appointment, Chancellor of the Exchequer Rachel Reeves reiterated that the 2% inflation target, measured by the 12-month year-on-year increase in the Consumer Price Index (CPI), is symmetrical and always effective, and is the core cornerstone of the UK's monetary policy framework.
However, the reality is that the continued rise in energy and shipping prices is triggering a severe second wave of transmission effects, with rising global agricultural product prices becoming the core driver of soaring food inflation.
Over the past three months, the average food inflation rate in the UK has reached 4.6%, a significant increase from 3.2% in the first three months of this year. Butter, beef, chocolate, and coffee, which account for only 10% of the food CPI basket, have directly contributed nearly 2 percentage points to food inflation.
More problematic is that the energy crisis is amplifying the pressure through the fertilizer supply chain: Egyptian urea prices, a regional benchmark, rose 54% in a month; the Middle East will contribute nearly 30% of the world's major fertilizer exports in 2024; and rising energy prices in the UK have resulted in fertilizer production being able to meet less than half of farmers' needs, forcing importers to source fertilizers overseas, further driving up supply chain costs.
Coupled with rising energy prices, food price increases are a foregone conclusion, which also refutes the central bank's argument that "core inflation does not push up overall inflation."
Normally, raising interest rates to address inflation transmission is a routine practice, but the Bank of England has fallen into a policy paradox.
According to the letter of mandate, the central bank is required to support the government’s economic growth and employment goals (i.e., Reeves’ “safety economics”) on the premise of achieving the inflation target.
However, energy and supply chain shocks are significantly weakening the UK economy, and interest rate cuts should have been implemented to support growth; but Prime Minister Keir Starmer has made reducing the cost of living a top priority, while demanding interest rate hikes to curb inflation.
The inherent contradictions in government policies are directly transmitted to the central bank, putting it under dual pressure of "raising interest rates to curb inflation and lowering interest rates to maintain growth"—unless a path can be found to achieve both simultaneously, policy failure is inevitable.
At the same time, the market has begun to shift from the logic of stagflation to a more pessimistic logic of recession. This contradiction is not unique to the UK, but is a common dilemma faced by most central banks around the world.
The market has already demonstrated through its actions that the Bank of England has lost control of interest rates. Affected by the global bond market sell-off triggered by the conflict with Iran, the UK government's financing costs have exceeded 5%, with the yield on 10-year government bonds rising 13 basis points to 5.081%, a new high since the 2008 financial crisis; the yield on 30-year gilts issued last week even reached 5.52%, significantly increasing the government's financing pressure.
The bond market turmoil quickly spread to the mortgage market: the average interest rate for a two-year fixed mortgage in the UK rose from 4.83% in early March to 5.75%, and the five-year fixed rate rose from 4.95% to 5.69%, hitting a 19-month high. This not only suppressed house prices but also completely dashed the central bank's previous expectations of interest rate cuts.
More seriously, the central bank's £528 billion exposure to government bonds has been continuously damaged in its profit and loss statement under the dual impact of rising benchmark interest rates and soaring bond yields; and in February, net borrowing of UK personal housing mortgages reached £4.8 billion (above the six-month average), and this was before the conflict and soaring mortgage rates, which may further exacerbate the economic pressure.
The core root of this predicament lies in the fact that the energy supply crisis caused by the war has not been fundamentally resolved.
According to The Wall Street Journal, US President Trump has told his staff that the US is willing to end its military operations against Iran even if the Strait of Hormuz remains largely closed—a move that would extend Tehran’s control of the waterway, leaving the complex process of reopening the strait to be dealt with at a later date.
The Trump team's assessment indicated that opening this shipping route would extend the conflict beyond the initial timeline of four to six weeks, therefore the United States would gradually withdraw its troops after achieving its core objective of weakening the Iranian navy and missile stockpile.
The next step will be to pressure Iran through diplomatic channels to restore free trade. If diplomacy fails, Washington will push for Europe and its Gulf allies to lead the reopening of the Straits. While military options remain, they are not a priority at present.
This decision, seemingly aimed at "stopping the bleeding," actually sows the seeds of future problems: the Strait of Hormuz, a vital choke point for global energy and agricultural supplies transportation, has been closed for a long time, directly leading to a widening supply gap. The uncertainty of "being closed again at any time" makes the energy crisis exhibit a "stubborn" characteristic.
The combined effects of the energy crisis and war are pushing the global economy to the brink of recession. For the UK, the risk of stagflation—high inflation and stagnant growth—continues to intensify, rendering the central bank's monetary policy completely ineffective.
Globally, energy shortages have driven up costs across the entire supply chain, and inflation has spread from energy to food and manufacturing. Central banks around the world are caught in a dilemma between "stabilizing growth" and "controlling inflation," leading to a reversal of expectations for interest rate cuts and a rise in expectations for interest rate hikes, severely suppressing global economic growth momentum.
The Bank of England's loss of control is a precise microcosm of this global crisis—when war cuts off the core channels for the global flow of energy and agricultural inputs, and when geopolitical conflicts make supply-side recovery seem a distant prospect, even the most advanced central bank systems are unable to withstand the double impact of inflation and recession.
With the Strait of Hormuz still closed and energy supply bottlenecks difficult to overcome, the global economy is caught in a vicious cycle of "war—energy shortage—high inflation—stagnation—central bank failure." Ultimately, the market may experience a brief rebound in asset prices followed by a more severe pricing cycle from trading stagflation to trading recession.
However, under the dual pressure of geopolitical conflict and energy crisis, this advanced system has proven ineffective: the Bank of England is caught in a dilemma of out-of-control interest rates, and this is by no means an isolated case. It reflects the grim reality that the global energy crisis is difficult to control under the shadow of war, and is deeply intertwined with the shadow of economic recession.
Feverish Inflation: The Transmission and Amplification of the Energy Crisis
The Bank of England's predicament stems from the sharp divergence between its inflation target and actual inflation. In her letter of appointment, Chancellor of the Exchequer Rachel Reeves reiterated that the 2% inflation target, measured by the 12-month year-on-year increase in the Consumer Price Index (CPI), is symmetrical and always effective, and is the core cornerstone of the UK's monetary policy framework.
However, the reality is that the continued rise in energy and shipping prices is triggering a severe second wave of transmission effects, with rising global agricultural product prices becoming the core driver of soaring food inflation.
Over the past three months, the average food inflation rate in the UK has reached 4.6%, a significant increase from 3.2% in the first three months of this year. Butter, beef, chocolate, and coffee, which account for only 10% of the food CPI basket, have directly contributed nearly 2 percentage points to food inflation.
More problematic is that the energy crisis is amplifying the pressure through the fertilizer supply chain: Egyptian urea prices, a regional benchmark, rose 54% in a month; the Middle East will contribute nearly 30% of the world's major fertilizer exports in 2024; and rising energy prices in the UK have resulted in fertilizer production being able to meet less than half of farmers' needs, forcing importers to source fertilizers overseas, further driving up supply chain costs.
Coupled with rising energy prices, food price increases are a foregone conclusion, which also refutes the central bank's argument that "core inflation does not push up overall inflation."
The policy paradox remains unresolved: the dual pressure of interest rate hikes and cuts.
Normally, raising interest rates to address inflation transmission is a routine practice, but the Bank of England has fallen into a policy paradox.
According to the letter of mandate, the central bank is required to support the government’s economic growth and employment goals (i.e., Reeves’ “safety economics”) on the premise of achieving the inflation target.
However, energy and supply chain shocks are significantly weakening the UK economy, and interest rate cuts should have been implemented to support growth; but Prime Minister Keir Starmer has made reducing the cost of living a top priority, while demanding interest rate hikes to curb inflation.
The inherent contradictions in government policies are directly transmitted to the central bank, putting it under dual pressure of "raising interest rates to curb inflation and lowering interest rates to maintain growth"—unless a path can be found to achieve both simultaneously, policy failure is inevitable.
At the same time, the market has begun to shift from the logic of stagflation to a more pessimistic logic of recession. This contradiction is not unique to the UK, but is a common dilemma faced by most central banks around the world.
Markets vote with their feet: runaway interest rates and pressure on balance sheets
The market has already demonstrated through its actions that the Bank of England has lost control of interest rates. Affected by the global bond market sell-off triggered by the conflict with Iran, the UK government's financing costs have exceeded 5%, with the yield on 10-year government bonds rising 13 basis points to 5.081%, a new high since the 2008 financial crisis; the yield on 30-year gilts issued last week even reached 5.52%, significantly increasing the government's financing pressure.
The bond market turmoil quickly spread to the mortgage market: the average interest rate for a two-year fixed mortgage in the UK rose from 4.83% in early March to 5.75%, and the five-year fixed rate rose from 4.95% to 5.69%, hitting a 19-month high. This not only suppressed house prices but also completely dashed the central bank's previous expectations of interest rate cuts.
More seriously, the central bank's £528 billion exposure to government bonds has been continuously damaged in its profit and loss statement under the dual impact of rising benchmark interest rates and soaring bond yields; and in February, net borrowing of UK personal housing mortgages reached £4.8 billion (above the six-month average), and this was before the conflict and soaring mortgage rates, which may further exacerbate the economic pressure.
The contradiction of delayed war: a persistent hidden danger of the energy crisis
The core root of this predicament lies in the fact that the energy supply crisis caused by the war has not been fundamentally resolved.
According to The Wall Street Journal, US President Trump has told his staff that the US is willing to end its military operations against Iran even if the Strait of Hormuz remains largely closed—a move that would extend Tehran’s control of the waterway, leaving the complex process of reopening the strait to be dealt with at a later date.
The Trump team's assessment indicated that opening this shipping route would extend the conflict beyond the initial timeline of four to six weeks, therefore the United States would gradually withdraw its troops after achieving its core objective of weakening the Iranian navy and missile stockpile.
The next step will be to pressure Iran through diplomatic channels to restore free trade. If diplomacy fails, Washington will push for Europe and its Gulf allies to lead the reopening of the Straits. While military options remain, they are not a priority at present.
This decision, seemingly aimed at "stopping the bleeding," actually sows the seeds of future problems: the Strait of Hormuz, a vital choke point for global energy and agricultural supplies transportation, has been closed for a long time, directly leading to a widening supply gap. The uncertainty of "being closed again at any time" makes the energy crisis exhibit a "stubborn" characteristic.
Global transmission effects: From stagflation risk to recession warning bells
The combined effects of the energy crisis and war are pushing the global economy to the brink of recession. For the UK, the risk of stagflation—high inflation and stagnant growth—continues to intensify, rendering the central bank's monetary policy completely ineffective.
Globally, energy shortages have driven up costs across the entire supply chain, and inflation has spread from energy to food and manufacturing. Central banks around the world are caught in a dilemma between "stabilizing growth" and "controlling inflation," leading to a reversal of expectations for interest rate cuts and a rise in expectations for interest rate hikes, severely suppressing global economic growth momentum.
The Bank of England's loss of control is a precise microcosm of this global crisis—when war cuts off the core channels for the global flow of energy and agricultural inputs, and when geopolitical conflicts make supply-side recovery seem a distant prospect, even the most advanced central bank systems are unable to withstand the double impact of inflation and recession.
With the Strait of Hormuz still closed and energy supply bottlenecks difficult to overcome, the global economy is caught in a vicious cycle of "war—energy shortage—high inflation—stagnation—central bank failure." Ultimately, the market may experience a brief rebound in asset prices followed by a more severe pricing cycle from trading stagflation to trading recession.
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