The Bank of England cut its growth forecasts on Thursday, at the same time predicting that inflation could rise to nearly double its 2 per cent target.

It now expects the economy to grow by 0.75 per cent in 2025, down from its previous estimate of 1.5 per cent, but predicts that inflation will hit 3.7 per cent by the middle of this year.

This has led to fears of “stagflation” – a combination of weak growth and rapid price rises.

But how bad is stagflation, and what does it mean for your mortgage and your pension?

What is stagflation?

The term was first used in 1965 by the Tory politician Iain Macleod (who in 1970 became Chancellor for a little over a month) in a speech attacking the then Labour government.

At the time, inflation was well above 4 per cent, but there was high unemployment as well.

Mr McLeod said: “We now have the worst of both worlds – not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of ‘stagflation’ situation.”

Stagflation is considered bad because prices are going up rapidly, making things unaffordable, and because economic growth is so poor, companies are not expanding, so jobs are often cut, meaning people have less money, and so their quality of life gets worse.

The situation can pose a conundrum for economists to solve.

Usually, combatting inflation would mean raising interest rates, so that borrowing becomes more expensive and therefore people cannot pay higher prices for goods – so prices fall.

But doing this also weighs down on the economy, so the tonic for one part of the problem worsens the other.

What does stagflation mean for mortgage rates?

The inflation part of “stagflation” is broadly bad news for mortgage rates.

High inflation generally means that the Bank of England cannot cut interest rates, or at a minimum cannot cut them as quickly as it would if inflation were lower.

Fixed mortgage rates tend to fall on expectations that interest rates will fall in the future, whereas tracker and variable rates fall immediately when interest rates do.

The flip side of things is that low economic growth may keep the Bank of England from keeping interest rates too high.

The result is a difficult balancing act for the Bank. The outcome for interest rates and mortgages will become clearer later this year.

As of Thursday, the base rate sits at 4.5 per cent.

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said: “The unanimous decision to loosen policy [drop rates] suggests that concerns among rate setters over the UK’s struggling economy are currently outweighing worries over rising inflation, opening the door for another rate cut sooner rather than later.

“With the Bank of England’s latest forecasts suggesting that stagflation is a growing risk, the path to future interest rate cuts is likely to become more treacherous, particularly given mounting global headwinds.”

What does stagflation mean for pensions?

High inflation is bad news for pensions generally as it erodes the power of someone’s pension savings.

For example, if you are 67 and plan to retire in a year, assuming you have a pot of £87,500 in today’s money – roughly the average someone older than 50 will have by retirement, according to Pension Bee – then one year later, if inflation runs at 3.7 per cent, and your investment growth is 3.7 per cent, your pot would be worth £90,737, but in real terms you would not have actually gained any money – your gains would be wiped out by inflation.

If growth were the same and inflation was 2 per cent, then your pot would have far more purchasing power.

This is the same for cash saving pots.

Poor growth, the stagnation element of inflation, could also mean that pension pots grow by less than they would otherwise, which is further bad news for pensioners.

However, there is a secondary effect of higher inflation. If CPI rises in August and September – as is forecast – it will give state pensioners a boost.

This is because September’s inflation figures will inform how the triple lock for next April is calculated.

If it rises, it could add hundreds of millions of pounds to next year’s state pension pot, which is increased in line with the highest of three measures – a flat 2.5 per cent rise, average earnings growth measured from May to July each year, and inflation measured in the year from September – according to the policy.