BoE likely to keep rates on hold despite inflation fears, economists say
The Bank of England is likely to express deep concern about a rise in inflation on Thursday but keep interest rates at record lows as a wave of Omicron coronavirus infections engulfs Britain, according to economists.
Despite a flurry of speculation in financial markets that the BoE’s Monetary Policy Committee could bite the bullet by midday and raise interest rates from 0.1% to 0.25%, most economists believe that a majority of members will vote to keep the fire.
Even the most hawkish members of the committee, including external member Michael Saunders, has previously suggested that new facts surrounding the virus may require a pause for further thought.
With the labor market tightening and inflation in November at 5.1%, the highest level in a decade, the The IMF has asked the central bank to act and avoid “inaction bias,” but economists lined up on Wednesday to say the BoE would hold tight.
Krishna Guha at Evercore ISI said he was confident the BoE would delay rate hikes, which would “reflect a higher level of interest rate tightening than tapering quantitative easing in terms of learning about Omicron and the balance of its supply and demand influences, along with the imposition of new UK activity restrictions”.
The Federal Reserve vowed to accelerate the pace of easing in asset purchases and forecast three interest rate hikes next year after its meeting on Wednesday, in response to rising inflation to its highest level in decades. century in the US in November. The European Central Bank is also expected to announce a slowdown in asset purchases at its meeting on Thursday.
In the UK, asset purchases were scheduled to end in January and the focus is on the next step on raising interest rates from current levels of 0.1% in an attempt to cool spending and lower inflationary.
Even though all economic conditions to increase interest rates set by the MPC after its November meeting had been met, the additional uncertainty of the Omicron variant provided an opportunity for the BoE to wait until its next meeting in February.
Allan Monks, UK economist at JPMorgan, said the spread of the virus, with 78,000 cases reported on Tuesday, would pose an acute near-term risk to the economy. He thinks this will not be accepted and so expects the MPC to be hawkish while they do nothing about interest rates.
“We expect MPC tomorrow to retain language similar to November by stating that rate hikes are still likely to be needed in the coming months,” Monks said.
But with strong economic data, some economists have sided with financial market participants, who are betting on a rate hike. “We continue to think the bank will raise interest rates tomorrow to prepare the ground for more substantial tightening tomorrow,” said George Buckley, chief UK and euro zone economist at Nomura. next year.”