The Bank of England hiked rates for a tenth consecutive meeting on Thursday.

The 50bps move was the fourth half-point hike of the cycle. The BoE is walking a tightrope at a time of pervasive uncertainty in the UK, which has the dubious distinction of being the only G7 economy expected to contract this year, according to the latest IMF estimates.

Inflation is still in the double-digits and a prolonged downturn is the BoE’s base case, even as the slump is now expected to be “much shallower” than that projected in the November vintage of the bank’s monetary policy report.

The vote at February’s meeting was 7-2. Recall that December’s decision was a three-way split, underscoring just how ambiguous the outlook for the UK economy really is.

The situation was vexing enough for the bank without a fiscal crisis, but when it rains it pours. Liz Truss’s short-lived stint as prime minister threw markets into turmoil, sent gilts reeling and pushed the pound to a record low. Although the panic subsided, it nevertheless manifested in a 75bps hike in November, the largest in 33 years.

The BoE predicted a swift decline in price growth in new forecasts released on Thursday, mostly owing to base effects. “The MPC’s updated projections show CPI inflation falling back sharply from its current very elevated level, in large part owing to past increases in energy and other goods prices falling out of the calculation of the annual rate,” the bank said.

Policymakers see CPI dropping more than six full points to around 4% by year-end. The BoE’s projections for inflation in the pandemic era have proven to be misguided at every juncture.

While fully acknowledging the impossibility of the task, the figure above is objectively unfortunate, to put it politely. If you’re inclined to put any stock in the projections, note that by Q2 of next year, the BoE sees CPI running at just 1%. The forecast horizon now reaches into 2026.

Conditioned on the market-implied path for the policy rate (so, a terminal rate of ~4.5% by mid-year and 125bps of cuts by 2025), and assuming an “increasing degree of economic slack [and] falling external pressures,” inflation might fall “below the 2% target in the medium-term,” the bank said, but noted that “there are considerable uncertainties around this medium-term outlook.” If you ask the BoE (and why wouldn’t you?) the risks to inflation remain “skewed to the upside,” and “significantly” so.

The new GDP forecasts appeared to show a seven-quarter contraction assuming the market-implied path of rates, and a longer contraction assuming Bank Rate stays at 4%. Either way, GDP is seen falling throughout this year and into 2024, even as “recent strength in the labor market” and falling energy prices suggest the odds of a deep recession are now lower.

Politically, it doesn’t make much difference. Conservatives are finished, at least for a while. Truss made sure of that. A recession, deep or not, that lasts more than a year is a political death sentence, and if inflation in the services sector proves difficult to dislodge, the stagflationary vibe will be impossible to ignore. Rishi Sunak is grappling with intense labor unrest and a ballooning budget deficit ostensibly limits the government’s capacity to address restive workers.

All in all, it’s a highly precarious situation, and monetary policy is between a rock and a hard place. The February BoE statement suggested a pause. “The extent to which domestic inflationary pressures ease will depend on the evolution of the economy, including the impact of the significant increases in Bank Rate so far,” policymakers said. “The MPC will continue to monitor closely indications of persistent inflationary pressures,” they added. “If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.”