The Bank of England’s Monetary Policy Committee meets on 18 June and faces a clear decision, according to economist Damian Pudner: hold Bank Rate at 3.75 per cent and end active quantitative tightening.
Pudner, a senior research fellow at the Great British Think Tank, argues the British economy is not overheating but is instead running on fumes, with conditions deteriorating across multiple indicators.
Unemployment has risen to five per cent and is expected to climb higher, while vacancies have fallen to 705,000, their lowest level in five years, signalling a weakening labour market.
Payrolls fell by 100,000 in April compared with March, and regular pay growth has slowed to 3.4 per cent, leaving real wage growth barely positive once inflation is factored in.
Pudner points to the well-established principle that monetary policy operates with long and variable lags, meaning previous rate rises are still working their way through the economy via mortgage refinancing and elevated Business borrowing costs.
Consumer confidence remains weak, forward-looking business surveys including Purchasing Manager’s Index data have softened, and hiring intentions are deteriorating, painting a picture Pudner describes as incompatible with further tightening.
The Bank of England stands apart from most major central banks, which are allowing their quantitative easing-era bond portfolios to shrink through passive maturity run-off rather than actively selling bonds into the market.
By selling gilts directly, the Bank is asking investors to absorb heavy new Treasury issuance alongside additional supply from Threadneedle Street simultaneously, which Pudner describes as a significant demand on a fragile market.
Higher gilt yields carry consequences well beyond financial markets, feeding into mortgage pricing, business investment, commercial property valuations, and the government’s own debt interest bill, which is already consuming a substantial share of public revenue.
The Office for Budget Responsibility has calculated that the Treasury has transferred £49.4 billion to cover Asset Purchase Facility losses since the earlier surplus period ended, with the lifetime net cost of quantitative easing now estimated at £104.2 billion.
The underlying problem, Pudner argues, is that the Bank purchased long-dated gilts at historically low yields and financed them with reserves remunerated at Bank Rate, a trade that looked manageable when rates were near zero but became costly once Bank Rate rose sharply.
Britain effectively shortened the maturity profile of a large portion of the national debt at a critical moment, concentrating interest rate risk in a way that is now being felt through APF losses and tighter financing conditions for households and businesses.
Pudner stops short of calling for a restart of quantitative easing, which he says would send the wrong signal and raise legitimate questions about the Bank’s inflation-fighting credibility, damaging trust that took considerable effort to rebuild.
The recommended course is narrower: hold Bank Rate, stop active gilt sales, and allow the balance sheet to shrink only as bonds reach maturity, removing what Pudner calls an unnecessary tightening channel during a period of visible economic weakness.
Pudner is clear that ending active quantitative tightening would not resolve Britain’s broader fiscal challenges, including productivity weakness, planning constraints, energy costs, or public sector inefficiency, but would stop the Bank adding avoidable pressure to an already strained gilt market.