The Bank of England said the urgency of tightening the UK monetary policy is under consideration and inflation could exceed 4,0%, prompting investors to bet on an interest rate hike.

While the Bank of England maintained extremely soft monetary policy parameters in line with economists' forecasts, officials changed their forecasts. Deputy Governor Dave Ramsden joined Michael Saunders in insisting that the bond purchases had to be halted as soon as possible.

Noting the "modest tightening" of monetary policy forecasted for August "some developments during the intervening period appear to have strengthened that case, although considerable uncertainties remain," the bank stated in its monetary policy summary.

Financial markets placed bets on an interest rate hike before February, while the pound strengthened as investors reacted to a decision that places the Bank of England in the hawkish camp of developed country central banks during a crucial week. On Wednesday, the US Federal Reserve announced that officials may soon cut bond purchases, and Norges Bank raised its interest rate on Thursday.

The UK central bank is trying to curb inflation, which accelerated over the summer while significantly exceeding forecasts and reached 3.2% in August. The stronger-than-expected jobs data facilitated the new policy, which shows that peak unemployment will be well below the worst-case scenario projected at the start of the pandemic.

According to Luke Bartholomew, an economist at Aberdeen Standard Investments, the impending end of layoffs is a major source of uncertainty which the economy faces, but at this point, the bank seems relatively confident that the economy can handle this shock without a significant increase in unemployment.

Traders are now assuming a 15 basis point rate hike in February compared to the rate in May. The pound rose by 0.6%, while 10-year bond yields increased the most in a week.

The Bank of England kept its interest rate unchanged at a record low of 0.1%, while its asset purchases will reach 895 billion pounds ($1.2 trillion) by the end of this year. Governor Andrew Bailey and policymakers unanimously agreed that any future policy tightening should begin with an interest rate increase.

Ramsden joined Saunders in voting to stop the current asset purchase program as soon as practical, which was an unexpected change that would reinforce the assumption that the Bank of England had changed altered its viewpoint.

"There was increasing evidence from a range of global and domestic cost and price indicators that inflationary pressures were likely to persist," the bank stated in the minutes, adding that "these members judged that, with the existing policy stance, inflation was likely to remain above the 2% target in the medium term."

The decision was also notable for the participation of two new MPC members: Huw Pill, former Goldman Sachs Group Inc. analyst who replaced Andy Haldane as chief economist, and Catherine Mann, former OECD chief economist. Both of them voted with the majority on this issue.

The Bank of England forecasts inflation at 2.0% but it may temporarily double that level in the last three months of the year, slightly more than in August, officials said. "The material rise in spot and forward wholesale gas prices since the August Report represented an upside risk to the MPC's inflation projection from April 2022, and meant that CPI inflation could remain above 4% into 2022 Q2," the MPC added.

Along with the MPC meeting results, the Bank of England released an exchange of letters between Bailey and Chancellor of the Exchequer Rishi Sunak to note a spike in inflation above the institution's allowable 3%.

"Most indicators of cost pressures have remained elevated," Bailey wrote. "That said, it appears that supply conditions in the global semiconductors sector have improved slightly, although it will take some time for previous order backlogs to clear."

While the Bank of England's more hawkish rhetoric follows a notable surge in inflation, it also comes amid an economic recovery that has shown signs of weakening amid supply and labor shortages.

Thursday's data showed that about 5.8% of workers in the UK were laid off earlier this month, even though that support program expires September 30. September is also the weakest month for private sector activity.