The war in Iran continues to cast a long shadow over the global economy, in Britain, the concern is understandably what this means for household finances. Rising oil prices are quickly climbing the list of risks to British consumers, not in abstract geopolitical terms, but in the very real impact on their wallets. When energy costs rise, so too does the cost of producing and transporting goods, and that inevitably feeds through to higher prices at the till.
That prospect is particularly troubling given the lingering cost of living crisis. Inflation may have fallen from its peak of 11.1 per cent in October 2022, but it has struggled to settle comfortably around the Bank of England’s 2 per cent target. Now, with fresh inflationary pressures building, the Bank has opted to hold interest rates at 3.75 per cent rather than cutting rates and there is growing speculation that rates could even rise again in the months ahead.
This raises serious questions about the effectiveness and the remit of the Bank of England. In theory, its job is straightforward: maintain price stability. In practice, it is anything but. The Bank is also tasked with supporting the government’s objectives for growth and employment, a formulation that muddies the waters and forces policymakers into making inherently political trade-offs. To bring inflation down, the Bank must suppress demand. But suppressing demand risks weakening growth and increasing unemployment. The result is a central bank pulled in two directions at once.
This issue is further compounded by the latest labour market figures which show an economy which is losing the little momentum it had. In the quarter to January 2026, both employment and unemployment rose, while inactivity fell which is a sign that more people are entering the labour market, but not all are finding work. Vacancies remained broadly flat and, crucially, wage growth slowed to its lowest level in five years. Taken together, this points to a cooling labour market, with firms becoming more cautious about hiring. On top of this, the economy is mired in a personal recession, meaning two successive quarters of declining GDP per capita. What little growth there is in the economy overall is not being seen in living standards.
Against this backdrop, pressure has been building on the Bank to cut rates to support growth. Even where pressure was -not explicit, the political reaction tells its own story. The chancellor’s celebration of previous rate cuts underscores just how central monetary policy has become to the government’s growth strategy. But this reliance is misplaced. Monetary policy cannot carry the burden of economic growth, especially when it is simultaneously being asked to rein in inflation.
Rachel Reeves’ vision, set out in her Mais lecture, leans heavily on the idea of an active, strategic state working in partnership with business to deliver resilient growth. But the reality is that much of her strategy depends on factors outside her direct control, not least the path of interest rates.
There are, however, levers firmly within the government’s grasp that are being ignored. The most effective way to support growth is through fiscal discipline by reducing the size of the state, bringing down borrowing and easing the tax burden. Yet the trajectory is moving in the opposite direction. The Office for Budget Responsibility forecasts welfare spending will climb to £407 billion by the end of the forecast period, while debt interest costs are set to rise from £110 billion in 2025-26 to £137 billion by 2030-31. These are not the foundations of a dynamic, growing economy.
If the Bank of England is to do its job properly by bringing inflation under control, even at the cost of tighter monetary conditions then the government must play its part. That means using fiscal policy to support growth, not stifle it. Lower spending, lower debt and lower taxes would ease the pressure on households and businesses alike, creating the conditions for sustainable expansion.
The current approach asks too much of the Bank and too little of the government. Interest rates should be set with a clear focus on inflation. Growth, meanwhile, is the responsibility of ministers. Until that division of labour is restored, Britain risks being stuck in a cycle of weak growth, persistent inflation and ever-rising costs for taxpayers.