The Bank of England may hold off again next week on becoming the world's first big central bank to raise interest rates from their pandemic lows, due to the emergence of the Omicron variant of the coronavirus.
The BoE wrong-footed many investors a month ago when it kept Bank Rate on hold at 0.1%, saying it first wanted to see the extent of any hit to the labour market from the end of the government's job-protecting furlough scheme.
Data subsequently suggested there had been no jump in unemployment, clearing the way for the British central bank to follow up on its signals in recent months that it was getting ready to raise borrowing costs as inflation heads towards 5%.
That would put the BoE ahead of the U.S. Federal Reserve, where officials are debating how quickly they should wind down their bond-buying stimulus, a step before a rate hike that investors only see as a possibility from May next year.
European Central Bank President Christine Lagarde told a Reuters Next event last week that conditions for a rate hike in the euro zone were very unlikely to be met in 2022.
But the expectations of a BoE rate hike on Dec. 16, after its next meeting, have recently been hit by worries about the unclear risks posed by Omicron to public health and the economy.
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.
Saunders also said he was worried about growing inflation pressure caused by employers scrambling to find staff.
But investors immediately scaled back their bets in financial markets on a December hike.
“If even the most hawkish member of the MPC is signalling that there might be some value to waiting to see how serious the emergence of Omicron turns out to be, then we should expect the other members to have similar concerns,” said Brian Hilliard, an economist at Societe Generale.
Hilliard told clients on Monday he was changing his call on the timing of the first BoE rate hike from December until its following meeting in February.
'QUITE FLUID'
Allan Monks, a JP Morgan economist, similarly pushed his prediction back to February. But he also said advice from scientists about the risks posed by Omicron could quickly change the outlook once again.
“While the knee-jerk reaction might now be to think the MPC will pass on tightening until the February meeting, the situation is quite fluid and could yet change again by the time the committee meets,” Monks said in a note.
Adding another voice to the debate, BoE Deputy Governor Ben Broadbent said on Monday that no single factor should determine BoE decisions, and he pointed to longer-term inflation risks from the tight job market.
In an example of the kind of inflation-influenced wage pressure that might unsettle the BoE, distribution workers at Tesco, Britain's largest supermarket, are planning strike action after rejecting a 4% pay rise.
On Tuesday, investors were pricing in a roughly 50% chance of the BoE raising Bank Rate to 0.25% on Dec. 16, down from around 75% last week but higher than just a one-on-three chance immediately after the speech by Saunders on Friday.
Hilliard at Societe Generale said by February the BoE would have a much clearer idea of the jobs markets and Omicron might have proven to be less damaging to public health than feared.
“If that is the case, the debate might then revert to one over the size of the first increase rather than of its timing.”
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