28/03/2026 by Tony Redondo
The overarching theme this week is the return of stagflation fears, with the UK economy navigating a “perfect storm” of geopolitical energy shocks and deteriorating domestic data.
On 19 March, the BoE (Bank of England) voted unanimously to hold the base rate at 3.75%. The minutes of that meeting were far more hawkish than expected, with Governor Andrew Bailey explicitly noting that the conflict in the Middle East and disruptions in the Strait of Hormuz have created a fresh inflationary supply shock.
This has turned the 2026 interest rate outlook on its head.
In February, markets priced in an 86% probability of a 0.25% cut from 3.75% to 3.5% in March and expected the base rate to finish 2026 at 3%. Those hopes have now been dashed, with the BoE signalling that “higher for longer” is back on the table to combat potential secondary inflation from rising energy bills, forecast to spike again in the third quarter of 2026. Markets now expect the base rate to end the year at 4.75%, a full 1% above its current level and 1.75% above the earlier forecast.
The most alarming domestic headline came from Tuesday’s CBI Distributive Trades Survey, which showed retail sales plunging to pandemic-era lows and the steepest annual decline since the April 2020 Covid lockdown.
On Wednesday, UK CPI inflation held steady at 3% for February (pre-Iran War), though beneath the flat headline, core inflation ticked up unexpectedly from 3.1% to 3.2%.
US investment bank Morgan Stanley is warning that the UK is heading for recession, arguing that the Iran energy crisis is exposing Britain’s “soft underbelly” as factory costs soar at their fastest pace since Black Wednesday in 1992 when the UK’s withdrawal from the European Exchange Rate Mechanism triggered a collapse in the value of the Pound which fell 25% against the US dollar and 15% against the German Mark, forcing the BoE to raise interest rates from 10% to 15% in a single day. Bruna Skarica, Morgan Stanley’s chief UK economist, warned of “a pronounced UK recession at the turn of the year” should energy prices remain elevated and borrowing costs continue to rise. Simon French, chief economist at City stockbroker Panmure Liberum, echoed that view, calling a recession in the second half of 2026 “a real possibility.”
On the public finances front, the ONS (Office for National Statistics) reported a £14.3bn deficit for February, £5.8bn above forecasts with public sector net borrowing up £2.2bn year-on-year. Total borrowing for the 2025/26 financial year now stands at £125.9bn, against the OBR (Office for Budget Responsibility) full-year forecast of £133bn. Debt interest costs alone accounted for £5.5bn. Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics, warned that sustained gilt yield increases could erode the Chancellor’s fiscal headroom by £7.1bn by 2030/31.
The scale of the borrowing crisis is thrown into sharp relief by a stark comparison. The worst single-day spike during the Truss government in 2022 saw 30-year gilt yields reach 4.8%, a level Rachel Reeves described at the time as having crashed the economy. This week, that same yield hit 5.6%. The UK’s 10-year gilt yield, the benchmark cost of government borrowing is now at an 18-year high to levels not seen since the Great Financial Crash of 2008. The critical difference is that UK national debt stood at around 48% of GDP in 2008; today it is 94%, making debt servicing costs far heavier. Of the £14.3bn borrowed in February alone, £13bn went solely on interest payments on existing debt. This means that for every 1% rise in interest rates, the cost to the taxpayer is roughly double what it would have been in 2008 because the total “mortgage” the country holds is twice as large relative to the economy.
https://www.express.co.uk/finance/personalfinance/2185445/experts-warn-war-uk-taxpayers
Currency Exchange Rates Update
The Pound has held up better than most G10 currencies through March, despite another volatile week with the Pound acting as a “middle child” between a burgeoning US Dollar and a struggling Euro.
The Pound finished the week little changed against the Euro (up 0.11%) and 0.83% up in the last month at the time of writing.
Against the US Dollar, the Pound fell 0.59% in the week and is now 1.67% down in the last month against the greenback.
A notable success for the Pound is a 5.6% rise against the South African Rand in the last 30-days.
In the coming week, the key economic data releases and significant events include:
Monday EU Consumer Confidence Index
Germany CPI Inflation
Tuesday UK GDP & Nationwide House Prices
EU CPI Inflation
Canada GDP
Wednesday UK PMI Manufacturing
EU Unemployment
US Retail Sales & PMI Manufacturing
Thursday US Trade Balance
Canada Trade Balance
Friday US NFP (Non-Farm Payrolls) & Unemployment Rate
What’s in the news?
UK
Labour Prime Minister Sir Keir Starmer is planning new legislation that will allow Labour to transfer 76 EU laws back onto the UK statute book as the Government seeks closer alignment to the single market. The PM will introduce new legislation in the King’s Speech in May to allow Labour to transfer swathes of European regulation covering the agriculture and food sectors. The King’s Speech is expected the week after the 7 May local elections.
Peter Kyle, the Business Secretary suggested Labour could change its stance on rejoining the EU, saying building closer ties with the EU as offering the “best opportunity” for the country’s trade prospects and for the UK economy to “fulfil its potential”. While he hailed deals with the likes of the US and India that would not have been agreed if the country was part of the customs union, Kyle later suggested that he did not want to get “bogged down by institutional relationships” and directly linked the UK to European countries in a global competition for businesses to grow.
The Labour party is facing an historic collapse in its share of the vote in Wales as it faces the prospect of being removed from power in Wales for the first time since devolution. The MRP survey conducted by YouGov predicts that Plaid Cymru will become the largest party in the Senedd, winning 43 seats. Nigel Farage’s Reform Party is expected to come in second with 30 seats, while Labour’s support is projected to drop to just 13% of the vote, resulting in approximately 12 seats and the Conservatives could be reduced to a single seat and that the Liberal Democrats might be eliminated.
The projected decline of Labour in Wales could have broader implications for the party’s leadership. Sir Keir Starmer’s position as Prime Minister may be threatened if Labour loses its Welsh heartland, a stronghold for the party since 1999.
Good news
Retail giant Next has unveiled a huge new development which it says will add £2.5bn to the economy, as the FTSE 100 firm invests over £300m in its warehouses. The firm has been granted planning permission to build a new 1.2m sq. ft warehouse in its Elmsall complex in Yorkshire, with construction set to commence in 2028 with the site set to be in full operation from the beginning of the next decade.
King Charles III opened a 2,689-mile footpath along England’s entire coast, the longest coastal walk in the world. The path, which took 18 years to complete, stitches together existing routes and adds 1,000 miles. It’s not without challenges. One section involves wading at low tide across an estuary; some bits occasionally fall into the sea; and Scotland and Wales get in the way. But if you manage that last bit, it raises the possibility of a 9,000-mile walk around all of Britain. At 15 miles every day, it would take two years.
Not so good news
The OECD (Organisation for Economic Co-operation and Development) has warned that a prolonged war in Iran could drive up the costs of oil, gas, and fertilisers, worsening the economic outlook for major economies with the UK particularly badly affected. The OECD has downgraded its forecast for UK GDP in 2026 to just 0.7%, 0.5% lower than earlier expectations, leaving Britain with the second-slowest growth in the G7, ahead of only Italy. The OECD also stated that UK inflation is expected to be 1.5% higher this year than previously anticipated with the CPI (Consumer Prices Index) inflation now projected to average 4% in 2026, an increase from the 2.5% forecast in December, before easing to 2.6% in 2027. This is the second-highest inflation rate in the G7, surpassed only by the US. Across the G20, growth is expected to weaken in the short term before gradually recovering by 2027. Some countries have already begun implementing defensive measures, including energy rationing in India and export restrictions in China.
https://www.birminghammail.co.uk/news/money/uk-growth-predictions-2026-cut-33665122
The RAC reported that Diesel prices have hit a three year high with a rise of more than 20% since late February. This sharp increase means that filling a typical family diesel car now costs around £94, roughly £16 more than at the beginning of the conflict. Petrol prices have also risen, with unleaded petrol climbing above 147p per litre, bringing the cost of filling a standard car to around £81, the highest level since last summer.
The SMMT (Society of Motor Manufacturers and Traders) reported that UK vehicle production has declined significantly, with output down 17.2% in February due to weakening global demand and mounting pressures on the automotive sector. Notably, commercial vehicle production fell by 74% due to restructuring at a major manufacturing plant. Exports also decreased, with overall shipments down by 11.5%. The EU remained the dominant market, accounting for nearly two-thirds of car exports. However, demand from key global partners has sharply weakened. Sales to the United States plummeted by 34.3%, exports to China dropped 66.4%, and shipments to Japan also declined.
The latest BRC (British Retail Council) Opinium data for March shows consumers are bracing for hard times, with confidence dropping to historic lows amid growing economic worries. Expectations for the economy over the next three months fell sharply to the lowest level ever recorded. Households’ views of their personal finances also worsened.
USA
On Thursday, US President Donald Trump pushed back the deadline for Iran to reopen the Strait of Hormuz or face attacks on its energy infrastructure, the second such extension. The 10-day reprieve could once again offer a brief calm to volatile energy markets.
At a G-7 meeting in France, US Secretary of State Marco Rubio hit on the key tension between the White House’s interest in a swift end to the war in Iran and the risks that would pose to trade in the region. Rubio predicted the conflict will end in “weeks not months” and said that the US “can achieve all our objectives without ground troops.” But he also warned that Iran could attempt to impose a toll system in the Strait of Hormuz after the conflict, a scenario which would require international participation to prevent. “The United States is prepared to be a part of that plan,” Rubio said. “We don’t have to lead that plan.”
Washington’s ambassador to the UK Warren Stephens has warned the UK that pursuing closer ties with the European Union will “not be viewed favourably” in the White House if it in any way affects the trading relationship between the UK and US. Stephens specifically referred to the government’s recent decision to adopt over 70 European rules onto the UK statute book was likely to “be a problem” in Washington if it threatens the recently struck deal with the US. Stephens also unleashed fresh rebuke of the UK’s refusal to grant new oil licences, saying the UK could be a price setter for energy if it opens up the North Sea. The ambassador has been a longstanding critic of the government’s unwillingness to allow energy companies to drill for new oil, previously saying it makes the UK a difficult place to do business.
In New York, the Dow Jones Industrial Average tumbled on Friday and fell into correction territory. The broad S&P 500 index lost 1.67% and ended the session at a seven-month low. The Nasdaq Composite dropped 2.15%, its fifth straight weekly decline.
The S&P business activity index showed that in March its combined gauge of manufacturing and services output hit an 11-month low. The US economy is still growing, just at a slower rate.
A new Gallup poll shows Americans are feeling more pessimistic about the job market with only 28% remaining confident in the US job market, down from 70% in 2022. While 72% say it’s a bad time to get a job, more than half of US workers are looking for a new or better one or at least watching for opportunities.
New data from Freddie Mac shows US mortgage rates jumped again this week, with the average for a 30-year fixed mortgage hitting 6.38%. Before the start of the war in Iran, rates had fallen below 6%their lowest level since 2022.
In a high-profile trial focused on social media addiction, a Los Angeles jury yesterday found that Meta and Google’s YouTube failed to warn users of dangers associated with the use of their platforms. The Southern Californian jury put compensatory damages at $3 million and punitive damages at another $3 million, both to be divided between the two tech companies. The verdict follows Meta’s loss in a separate trial over child exploitation on Tuesday. That jury found that the company violated New Mexico’s unfair practices act would have to pay $375 million in civil damages.
The EU
The OECD are forecasting that EU growth will fall from 1.2% to 0.8% in 2026 as a result of the Iran war with France and Germany both at 0.8% now. Energy price increases will simultaneously see EU inflation rise from 1.9% to 2.6%.
European borrowing costs hit 15-year highs as investors brace for rate rises in 2026 with both French and German 10-year bond yields hitting their highest levels since 2011while bonds issued by various other euro zone economies also sold off sharply. The sharp sell-off followed a speech from ECB (European Central Bank) chief Christine Lagarde, who said the ECB was prepared to raise its key interest rate even if inflation spikes brought on by the US-Iran war were short-lived.
Stagflation alarm bells are also ringing in the eurozone as the energy crunch hits the global economy. The S&P flash PMI data showed on Tuesday that economic activity in the eurozone slowed sharply in March with private sector output in the eurozone sank to a 10-month low in March.
The Danish Social Democrats suffered their worst election result in a century this week with Prime Minister Mette Frederiksen’s centre-left party winning just 22% of the vote marking the Social Democrats’ worst result since 1903. The left-wing Socialist Party and right-wing Danish People’s Party were the beneficiaries.
Others
South Africa’s central bank held its main interest rate at 6.75% and pushed back the prospect of cuts as the Iran war threatens to derail the country’s fragile economic recovery. Investment has surged in Africa’s biggest economy in recent months after a decade blighted by low growth.
Gulf tourism has ground to a halt with hotel occupancy in Dubai at 16%, down from the normal seasonal average of 90%.
Argentina’s GDP expanded 4.4% last year, further confirmation of President Javier Milei’s success in turning around the economy. The growth was the highest in years, apart from a pandemic bounce back, and part of Milei’s remarkable shift in South America’s second-largest economy. Since taking power in 2023, annual inflation, 160% when he became president has plunged and is now at 33.1%the lowest level in eight years.
Brent crude oil prices rose by 6.07% to finish the week over $114 a bbl. barrel after Trump’s decision to postpone strikes on Iran’s energy plants failed to alleviate fears of a protracted conflict. The Macquarie Group warned that oil may hit a record $200 barrel if the war drags on until June. A JPMorgan analysis found the world is now moving from a problem centred on a shock to energy flows to one of stock depletion, which is likely to turn into supply scarcity for much of the world. March saw one of the largest drawdowns on global oil inventories on record.
Stranger than fiction
A recent paper published in Nature, authored by 17 scientists, has found that levels of CO₂ and methane in the atmosphere remained broadly stable over the past three million years, even as the Earth underwent significant ice ages and temperature swings. Ice core data from Antarctica’s Allan Hills region, extending further back than previous 800,000-year records into the late Pliocene era, showed only a roughly 20 ppm variation in CO₂ over that period, far less than previously assumed. This challenges the conventional explanation that a drop from ~400 ppm to ~250 ppm of CO₂ drove the onset of the ice age 2.7 million years ago.
The findings suggest that large temperature changes including interglacial warming of 5°C or more occurred without corresponding shifts in greenhouse gas levels. Some scientists, including a co-author of the paper, argue this actually reinforces CO₂’s importance by implying the climate is more sensitive to even small changes in greenhouse gases. Critics of mainstream climate science, however, contend the findings undermine the central role attributed to CO₂ in driving temperature change.
We really might be made of stardust. All of the chemical components of DNA have now been discovered on a second asteroid. RNA and DNA are built from five chemical bases: adenine, guanine, cytosine, thymine, and uracil. A Japanese team has now identified all of those in rocks picked up from the surface of the asteroid Ryugu. The discovery corroborates the results from a 2023 NASA mission that returned samples from the asteroid Bennu that also contained all five nucleobases. Finding all five nucleobases of life on multiple asteroids dramatically increases the chance that life was seeded by materials brought to Earth by ancient space rocks.
The discovery of a canine jawbone in a cave in southern England suggests that dogs were domesticated 5,000 years earlier than previously thought. The bone dates from around 15,000 years ago; older dog-like bones do exist, some as old as 33,000 years, but scientists dispute whether they are true dogs or simply dog-like wolves. Genetic examination showed the latest find was unambiguously a dog, domesticated and living off human food; until now, fossils of true dogs were not known until 10,000 years ago.
Quote
Ayn Rand, “Fascism, Nazism, Communism and Socialism are only superficial variations of the same monstrous theme – Collectivism.”
