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Uncertainty of omicron variant

 Few economists are sure they understand the central bank’s likely response to new information about Omicron after the BoE surprised markets by not raising rates in November despite surging prices of goods and services. Still, most think the MPC will hold fire this month even if the new variant is expected to increase inflationary pressures. 

If Omicron was troublesome, he said the BoE could wait until next May to tighten monetary policy. However, his “baseline scenario” was that the economy would hold up relatively well, and a rate rise was “more likely than not” in December. 

Yael Selfin, an economist at KPMG, said Omicron would increase uncertainties over the short-term economic outlook, causing the BoE to “hold off raising interest rates this month”. 

Far from all economists share that the MPC will unchanged interest rates at the December meeting. Still, the disagreements relate primarily to how the central bank is likely to respond to new information about Omicron rather than the economic or epidemiological outlook. 

Analysts expect most BoE’s Monetary Policy Committee members to decide at their meeting on December 16 that they need more time to evaluate the implications of Omicron and will vote to leave rates on hold at the historic low of 0.1 per cent. 

David Owen of Saltmarsh Economics, a consultancy, said he expected an end to quantitative easing by the BoE and a 0.15 percentage point rise in rates, adding that the recovery had been solid and inflationary pressures were much higher than expected, and Covid-19 vaccines would catch up with Omicron. 

Michael Saunders, an external MPC member who voted to tighten monetary policy at the November meeting, said last week there could be advantages in waiting for more information about Omicron before raising rates. 

In public, however, MPC members had carefully avoided making any commitment to raising rates this month after sending signals before the November meeting that they were poised to tighten monetary policy. 

Robert Wood, an economist at Bank of America, said the BoE’s reaction to coronavirus uncertainty and inflation had changed so much this year the central bank was now “unpredictable”. 

Since the end of the government’s furlough scheme, once said by BoE officials to be the critical metric for a decision on interest rates, labour market data have been substantial: the number of people employed in the UK rose in October. 

Traders have also scaled back expectations for tighter monetary policy, which was fully included in the prices of overnight interest rate markets before the MPC’s November 4 meeting. Even so, she predicted the MPC was unlikely to be able to resist “the clear temptation to wait” and hold off on raising interest rates until the outlook for coronavirus and the economy was clearer. 

Last week, Huw Pill, BoE chief economist and MPC member, said the burden of proof had changed, and he was now looking for evidence preventing him from voting for a rise, although he added that Omicron might be the issue that stayed his hand. 

Ruth Gregory, an economist at Capital Economics, a consultancy, said Omicron was likely to raise inflationary pressures on goods and services by aggravating supply chain disruptions and discouraging people from working. 

Some economists think the outcome of the MPC’s December meeting is so uncertain they have deliberately avoided making precise predictions about future monetary policy. 

    According to economists and traders in financial markets, the new Omicron variant of the coronavirus has increased the likelihood of the Bank of England held back from raising interest rates this month. 

Privately, some MPC members say there is a difference in the evidence required for a vote for an initial rate rise compared with any subsequent increases because the first move sends a significant signal, and there is a higher credibility issue if it needs to be reversed. 

Unlike the US Federal Reserve, which has pivoted from boosting demand to tackling price growth, the BoE is focused on ensuring the economic recovery remains strong amid what it sees as a temporary bout of high inflation, according to analysts. 

Caution was the watchword for most MPC members, said Karen Ward, chief European market strategist at JP Morgan Asset Management.

Summarised www.sba.tax
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