The Bank of England Monetary Policy Committee split eight-to-one in support of a 50 basis point rate hike at its August meeting, despite forecasting that the UK was heading into recession, and told Bank staff to get ready to begin gilt sales in September.
MPC member Silvana Tenreyro voted for a 25 bps hike with the forecasts in the quarterly Monetary Policy Report showing that inflation would heavily undershoot the 2.0% target in three years's time, plunging from a 13.3% peak in October 2022 to just 0.76% in three years' time on market rates.
The MPC restated its line that it was prepared to act "forcefully" if inflationary pressures proved more persistent than expected, leaving the door open to another 50 bps hike if necessary.
The MPC's 50 bps hike, the first ever of that size by independent policymakers, coupled with the predictions of a substantial inflation undershoot down the line, make clear that the committee has acted to counter the risk of higher inflation getting embedded in the system, with labour demand back at pre-Covid levels but labour supply having diminished.
The majority on the MPC noted the evidence that "inflationary pressures were becoming more persistent," with a tight labour market and companies finding it easier to pass on price rises, and that faster tightening would "reduce the risks of a more extended and costly tightening cycle later."
The forecasts showed a sizeable negative output gap, with demand exceeding supply from 2023. The output gap was shown at -2.25 of GDP in 2023 and -3.25% in 2024 Q3 and -3.75 in Q3 2025.
While the Bank did not complete a comprehensive reassessment of supply, it cited evidence of how labour supply has turned out weaker than previously expected, with the labour market appearing "tighter than the unemployment rate alone suggests," with high vacancies and reduced participation. Unemployment was shown rising from 3.67% this quarter to 6.32% by Q3 2025 withe average weekly earning up 5.25% this year and next.
Based on constant market rates the MPC forecast inflation would fall from 9.92% in Q3 2023 to 1.27% in Q3 2025, entailing that even if the committee sat tight on policy it would eventually see a substantial policy undershoot.
On the market rate projection Bank Rate was shown peaking at 2.0% in 2023 before dipping to 2.4% in 2024.
For the first time this cycle the MPC predicted that the UK would slide into recession. It predicted five successive quarters of negative growth, starting in the fourth quarter of this year and extending to the end of 2023, with the economy shrinking a little over 2% from peak-to-trough.
GILT SALES START IN SEPTEMBER
The MPC also made clear that it was set to embark on active gilt sales from, accelerating the reduction of its gilt pile. The MPC judged that in the 12 months from September the stock of gilts would be reduced by around GBP80 billion, with this figure including the non-reinvestment of maturing gilts.
That implies active gilt sales of around GBP10 billion per quarter. The MPC said that there would a high bar to halting sales, with Bank Rate the active policy instrument. It gave no indication of the terminal point for gilt sales, with the pace to be reassessed after the first year.