News

By William Schomberg

LONDON (Reuters) – The Bank of England will say on Thursday whether it has delayed its first interest rate hike since the COVID-19 pandemic again, this time because of the fast-spreading Omicron variant, or is taking action to see off a surge in inflation.

Investors had been largely betting against an increase in Bank Rate with a new coronavirus wave in full swing, until data on Wednesday showed British consumer price inflation leapt by far more than expected and hit a decade-high 5.1% in November.

“The Monetary Policy Committee has a difficult decision to make,” Ellie Henderson, an economist at bank Investec said.

“There is now the real risk of inflation becoming entrenched – especially considering the signs of second-round effects in terms of rising wages, supported by a strong labour market – but this is balanced against the threat to the economic recovery from the new Omicron variant.”

A rate hike on Thursday would put the BoE ahead of the U.S. Federal Reserve. On Wednesday the Fed said it was speeding up a phase-out of its bond-buying stimulus, a first step before possibly three interest rate rises in 2022.

The European Central Bank and the Bank of Japan – due to give their latest policy statements on Thursday and Friday respectively – are further away from raising borrowing costs.

With global inflation pressures exacerbated by post-Brexit problems in Britain, the BoE has been signalling that the time to start weaning the economy off its huge pandemic stimulus programme is approaching.

But the British central bank wrong-footed many investors six weeks ago when it kept Bank Rate on hold at 0.1% rather than raise it to 0.25%, giving itself more time to see the extent of any hit to the labour market from the end of the government’s job-protecting furlough scheme.

Data subsequently showed no jump in unemployment. But market expectations were thrown up in the air again in late November with the emergence of the Omicron variant.

The United Kingdom recorded its highest daily coronavirus cases since the start of the pandemic on Wednesday and a senior British health official said a big rise in hospitalisations is “a nailed-on prospect”.

Michael Saunders, one of two members of the nine-strong Monetary Policy Committee who voted to raise Bank Rate to 0.25% in November, said on Dec. 3 there “could be particular advantages in waiting to see more evidence” of Omicron’s impact.

Bets in financial markets on a December Bank Rate hike to 0.25% fell to just one in three after his speech.

But they were back up to more than 60% on Wednesday after the shock inflation data.

On Tuesday, the International Monetary Fund urged the BoE not to succumb to “inaction bias”.

Economists said the results of a closely watched survey of purchasing managers – due to be published at 0930 GMT on Thursday – might have swung the outcome of the MPC’s vote on Wednesday, before its announcement on Thursday.