UK’s Bank of England Resists New Inflation Predictions with Continued Quantitative Tightening

Bank of England Economist Signals Easing Inflation Concerns

September 23, 2025

Geneva, Switzerland – A leading economist at the Bank of England has conveyed a more hopeful assessment of the United Kingdom’s inflationary trajectory than previously anticipated. The shift in viewpoint came during a public discussion held on Thursday, September 23rd.

Recent data reveals that the UK’s Consumer Price Index (CPI) reached 3.8% in August, marking the highest inflation rate among the Group of Seven (G7) nations.The central bank currently projects a peak of 4% in September, still double its 2% target.

Interest Rate Stance and quantitative Tightening

The economist, a member of the Monetary Policy committee (MPC) who previously voted against interest rate reductions in May and August, recently endorsed maintaining current interest rates at a meeting on September 18th. He also opposed any deceleration in the pace of Quantitative Tightening (QT), citing the need for a swifter approach and a belief that financial markets are resilient.

Known for a cautious approach to inflation, the economist acknowledged that his initial inclination leaned towards prioritizing control of increasing prices over concerns about economic slowdown. He stated, “As time passes, this view has changed. I am more optimistic now than I did six months ago, nine months ago, or a year ago.”

Factors Influencing Inflation

The economist highlighted several enduring factors contributing to UK inflation, including a delayed recovery in the labor force following the COVID-19 pandemic, the economic consequences of Brexit, and shifts in immigration policies. He also suggested that recent corporate tax increases could exacerbate inflationary pressures.

The Institution for Economic Cooperation and Development (OECD) revised its UK inflation forecast upwards on September 23rd, projecting 3.5% for 2025 and 2.7% for 2026, compared to previous estimates of 3.1% and 2.5% respectively. the Bank of England anticipates inflation returning to the 2% target by Spring 2027.

Did You Know? The UK’s decision to leave the European Union continues to be a notable factor analyzed by economists when assessing long-term inflation trends.

Here’s a quick overview of current inflation projections:

Organization	2025 Inflation Forecast	2026 Inflation Forecast
OECD	3.5%	2.7%
Bank of England	(Target 2%) – Projected Return	(Target 2%) – Projected Return

Pro Tip: Understanding the relationship between interest rates, quantitative tightening, and inflation is crucial for investors and financial planners.

Understanding Inflation and Monetary Policy

Inflation, the rate at which the general level of prices for goods and services is rising, impacts purchasing power and economic stability. Central banks like the Bank of England employ various tools, including adjusting interest rates and implementing quantitative tightening, to manage inflation and maintain economic equilibrium.

Quantitative Tightening (QT) involves reducing the central bank’s balance sheet by selling assets which were previously purchased to stimulate the economy, thereby reducing the money supply.

The UK’s economic landscape is shaped by unique factors, including its post-Brexit economic adjustments and the ongoing effects of the COVID-19 pandemic. These elements add complexity to inflation forecasting and monetary policy decisions.

Frequently Asked Questions About UK Inflation

• What is the current rate of inflation in the UK? The UK’s CPI for August was 3.8%, the highest among G7 nations.
• What is Quantitative Tightening and how does it affect inflation? Quantitative Tightening is a strategy used by central banks to reduce the money supply, aiming to lower inflation.
• What impact does Brexit have on UK inflation? Brexit is considered a long-term factor contributing to inflationary pressures in the UK due to changes in trade patterns and economic structures.
• What is the Bank of England’s inflation target? The Bank of England aims to maintain an inflation rate of 2%.
• What factors are influencing the economist’s increased optimism? the economist’s optimism stems from evolving economic data and a belief that long-term inflationary factors are beginning to moderate.

Do you believe the Bank of England is taking the right approach to managing inflation? Share your thoughts in the comments below!

How does the Bank of England’s commitment to quantitative tightening aim to bolster its credibility in the face of fluctuating inflation data?

The Stance Against Shifting Forecasts

Despite recent economic data suggesting a potential slowdown in inflation, the Bank of England (BoE) remains steadfast in its commitment to quantitative tightening (QT). This decision,announced on September 23,2025,signals a deliberate resistance to adjusting monetary policy based on short-term fluctuations. The core argument centers around the risk of prematurely easing policy and reigniting inflationary pressures.This is a critical moment for the UK economy, impacting everything from mortgage rates to business investment.

Understanding Quantitative Tightening: A Recap

For those unfamiliar, quantitative tightening is the reverse of quantitative easing (QE). QE involved the BoE purchasing government bonds and other assets to inject liquidity into the financial system, lowering borrowing costs and stimulating economic activity. QT, conversely, involves actively reducing the BoE’s balance sheet by allowing previously purchased assets to mature without reinvestment, or even by selling them.

Here’s a breakdown of the key effects:

* Reduced liquidity: QT drains liquidity from the financial system.

* Higher Bond Yields: As the supply of bonds increases (due to reduced BoE demand), yields tend to rise.

* Increased Borrowing Costs: Higher bond yields translate into higher borrowing costs for businesses and consumers.

* Cooling Demand: Increased costs aim to dampen overall demand in the economy, curbing inflation.

Why Resist Changing Course? The BoE’s Rationale

The BoE’s decision isn’t without its critics. Several economists predicted a pivot towards a more dovish stance given the recent dip in headline inflation figures.However, the Monetary Policy Committee (MPC) highlighted several key concerns:

* Sticky Core inflation: While headline inflation has fallen, core inflation – which excludes volatile energy and food prices – remains stubbornly high. this suggests underlying inflationary pressures are still present.

* Wage Growth: Robust wage growth continues to fuel demand and possibly contribute to a wage-price spiral. the BoE is closely monitoring wage settlements.

* Services Inflation: Inflation in the services sector, often considered a key indicator of domestic price pressures, is proving particularly persistent.

* Global Risks: Geopolitical uncertainties and potential disruptions to global supply chains pose ongoing risks to the inflation outlook.

The BoE believes that a premature easing of policy could undo the progress made in tackling inflation and potentially lead to a more prolonged period of economic instability. They are prioritizing long-term price stability over short-term economic boosts. monetary policy is a delicate balancing act.

The Impact on UK Markets: What to Expect

The continuation of QT is already having a noticeable impact on UK financial markets.

* Gilts Market: UK government bonds (gilts) have seen increased volatility,with yields rising in response to the BoE’s stance.

* Mortgage Rates: fixed mortgage rates are expected to remain elevated, potentially impacting housing affordability and demand. Variable rate mortgages will directly reflect any further increases in the Bank Rate.

* Sterling: The pound has experienced some strengthening against other major currencies, reflecting the BoE’s hawkish stance.

* Business investment: Higher borrowing costs may discourage businesses from investing in new projects, potentially slowing economic growth.

QT in Context: Comparing to Other Central Banks

The BoE’s approach to QT differs from that of other major central banks.The Federal Reserve in the US has also been engaged in QT, but at a slower pace. The European Central Bank (ECB) has been more cautious, delaying the start of QT and adopting a more gradual approach.

This divergence reflects differing economic conditions and priorities. The UK economy has faced particularly acute inflationary pressures, prompting the BoE to take a more aggressive stance. Central bank policy is rarely uniform.

Case Study: The 2022 Mini-Budget Fallout

The events following the September 2022 mini-budget serve as a stark reminder of the market’s sensitivity to fiscal and monetary policy. The unfunded tax cuts announced by the then-government triggered a sharp sell-off in gilts, forcing the BoE to intervene to stabilize the market. This episode underscored the importance of fiscal duty and the credibility of monetary policy. The BoE is keen to avoid a repeat of this scenario.

Benefits of Maintaining a Hawkish Stance

While QT undoubtedly creates short-term economic headwinds, the BoE argues that it offers several long-term benefits:

* Price Stability: The primary goal of QT is to bring inflation back to the BoE’s 2% target, fostering a stable economic habitat.

* credibility: Maintaining a firm commitment to fighting inflation enhances the BoE’s credibility and reinforces its independence.

* Long-Term Growth: Price stability is a prerequisite for sustainable long-term economic growth.

Practical Tips for Navigating the Current Economic Climate

For individuals and businesses, navigating the current economic climate requires careful planning and risk management: