The European Central Bank (ECB) and the Bank of England (BoE) may operate in different economies, but this week’s meetings delivered a strikingly similar message: inflation risks are creeping back just as growth is losing momentum, giving some belief to the idea that a stagflationary scenario could be emerging behind the scenes.

Both central banks kept interest rates unchanged, matching the wide consensus, but the tone beneath those decisions revealed a more complicated reality. Indeed, rate setters are no longer just managing disinflation; they are now dealing with a renewed inflation impulse, largely driven by energy, at a time when their economies are beginning to slow.

That combination is uncomfortable and increasingly familiar.

At the ECB, Christine Lagarde acknowledged that higher energy prices will keep inflation well above target in the near term, while also warning that risks to growth are tilted to the downside. In addition, business confidence is weakening, supply chains are coming under pressure, and the broader outlook has become highly uncertain.

Across the Channel, Andrew Bailey struck a similarly cautious tone, but with a more explicit edge. The ‘Old Lady’ went further in highlighting the risk that inflation could become embedded, particularly through so-called second-round effects on wages and prices. That concern was reflected not only in the language but also in the vote split (8-1), with one policymaker already calling for a rate hike (Huw Pill).

In both cases, the source of the problem is largely the same: the surge in energy prices, amplified by geopolitical tensions in the Middle East, is pushing inflation higher again. But unlike previous inflation waves, this one is arriving at a moment when domestic demand is softening and growth is under pressure.

That leaves central banks with very little room to manoeuvre.

Neither the ECB nor the BoE is ready to tighten policy aggressively in the face of a slowing economy. At the same time, neither is willing to ease. In fact, the BoE made it clear that part of its strategy now is simply not to cut rates as previously expected, effectively tightening financial conditions through expectations rather than action.

The ECB, for its part, is taking a more cautious approach, emphasising flexibility and refusing to pre-commit to any particular rate path. But the underlying message is similar: policymakers are waiting, watching, and hoping that the current inflation shock does not broaden.

All in all

The ECB and the BoE are facing the same dilemma, and neither has a clean solution. Inflation is rising again, growth is weakening, and energy prices are driving both sides of the equation.

For now, both banks are cautiously sitting on the sidelines. But if inflation proves more persistent, or if second-round effects begin to take hold, that stance could quickly be tested.