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(Bloomberg) -- The Bank of England’s decision to call time on almost two years of interest-rate increases is a signal that the risk of recession in the UK is fast replacing inflation as the chief concern for policy makers.

While the central bank’s Governor Andrew Bailey insisted there can be “no complacency” in the effort to rein in the worst bout of price rises in the Group of Seven nations, officials are increasingly focusing on signs that Britain’s sputtering recovery from the pandemic has taken a turn for the worse.

The BOE cited recent economic data pointing to a slowdown as a reason to believe more than 5 percentage points of rate hikes since 2021 is cooling inflationary pressures. In an unusual move, the BOE said it looked at unpublished purchasing managers’ index data due out Friday as among the things it was taking into account.

“There’s a risk of a technical recession over winter, although I don’t see the ingredients for a severe recession,” said Kallum Pickering, senior economist at Berenberg, said Thursday in an interview on Bloomberg TV. “We can see across the spectrum of indicators that monetary policy is weighing on economic activity.”

An end or even pause in the rate hiking cycle would be a relief to Prime Minister Rishi Suank’s government, which has put fighting inflation at the heart of its agenda. Higher rates have driven up mortgage costs, squeezing consumers little more than a year before the next election is due.

“It’s good news for families,” Chancellor of the Exchequer Jeremy Hunt said Thursday in an interview on LBC. “It’s good news for businesses. There are always ups and downs, but the big picture is that we are finally starting to win this battle.” against inflation.

While inflation remains more than triple the BOE’s 2% target, the conversation in policy circles and financial markets changed abruptly on Wednesday when official data showed the Consumer Prices Index slid unexpectedly to 6.7%. It gave the nine-member Monetary Policy Committee breathing space to await more data for signs that rate hikes to date are working.

Investors have reined in bets for higher interest rates quickly, pricing in just a risk of a further increase in the base rate, which is now 5.25%. At the start of August, the concern was that the key rate would peak near 6%, imposing more pain on households and businesses.

“To tighten further would therefore have risked administering an overdose before the existing medicine has had enough time to fully take effect,” said Kitty Ussher, chief economist of the Institute of Directors. “It has become increasingly clear over the summer that the Bank’s action to date is having the desired effect of constraining demand and bringing down inflation expectations.”

The BOE’s decision on Thursday called a halt for now to a series of 14 back-to-back rate hikes that boosted borrowing costs by more than 5 percentage points. Bailey cast the decisive vote in a 5-4 decision for no change from 5.25% after a summer of increasingly dismal economic statistics and surveys.

Gross domestic product shrank in the first few weeks of the second quarter, and PMI data for August showed that downturn continued. Unemployment has risen to its highest level since 2021, and new job vacancies have tumbled. Retail sales fell sharply in July, although consumer confidence has improved in the past few months.

The BOE “thinks it has done enough to get inflation back on track towards its 2% target — and is now worried about the risk of a sharper activity slowdown ahead,” said Vivek Paul, UK chief investment strategist at the BlackRock Investment Institute.

Some members of the MPC — including Swati Dhingra — believe the BOE may have already gone too far by overtightening policy. Deputy Governors Ben Broadbent and Dave Ramsden, and Chief Economist Huw Pill joined Dhingra and Bailey in opting for the first hold on rates in almost two years.

The BOE now expects GDP to “rise only slightly” in the third quarter versus the 0.4% growth it predicted in August. Underlying growth will be weaker than it first thought over the second half of 2023 as whole, it added.

There are “increasing signs of some impact” from the fastest tightening cycle in over three decades on the jobs market and wider economy, the meeting minutes said.

The Bank’s agents report, a survey of economic conditions released alongside Thursday’s decision, also painted a bleak picture of households cutting back on spending and business activity softening. “Contacts were increasingly pessimistic about the effect of higher mortgage payments and wider cost of living pressures on consumer spending over the coming year,” the report said.

Meanwhile, the minutes also suggested that inflation and the tight jobs market are not the threats they once posed.

The BOE kept in place guidance that more rate rises will be needed if there are signs of persistent price pressures. However, it gave a notably less gloomy assessment on the threat from inflation and the jobs market.

Bailey said in a broadcast interview following the meeting that the UK has “had very good news this week on the inflation front” but insisted that the “job’s not done yet.”

He ruled out any quick easing in monetary policy to rescue the UK from a slump, saying it’s too early to talk about rate cuts. However, economists question how long its tough line on high rates will last if Britain is indeed plunged into recession. 

In an interview Thursday on LBC radio, Bailey said:

• “I do believe that inflation is going to come down quite a bit further this year. The latest inflation number was below where we thought it would be and also encouragingly the components, were moving in the right direction.”
• “The next noticeable drop will be in the October number released in November because of what happened a year ago when prices went up a lot. And this will be taken into account in wage bargaining going forwards. That’s important. What we see there will be important.”
• “Those with the lowest incomes spend the highest proportion of their income on the essentials of life because you have to, and obviously food and energy are the essentials of life. And so it’s hit those people, those households the hardest. I’m very, very conscious of that.”

For James Smith, developed market economist at ING, the BOE’s shift is a signal that rates cuts may well emerge on the agenda despite what Bailey is saying.

“Publicly, the Bank of England has been clear that it won’t be lowering rates any time soon,” Smith said. “But in practice, we suspect we could see some initial cuts by the middle of next year.”

--With assistance from Lucy White and Andrew Atkinson.

(Updates with comments from Bailey in final paragraphs.)