The uncertainty over Omicron and the introduction of new restrictions in England mean the Bank of England is less likely to hike rates next week, some experts say.
Economists and investors assume that the UK central bank will be more inclined at its December 16 meeting to keep borrowing costs at record lows of 0.1%.
Money market bets on a 15 basis point rate hike in the UK next week to 0.25% have fallen further to around 40% today. That’s a 46% decline on Wednesday and nearly 70% early last week, according to refinitive data reported by Reuters.
🇬🇧 MARKET BETS ON A 15 BPS BANK OF ENGLAND PRICE INCREASE IN THE NEXT WEEK FALL TO 41% VS 46% ON WEDNESDAY AND ALMOST 70% AT THE START OF THE LAST WEEK – RTRS
December 9, 2021
Another measure of interest rate probability, based on interest rate swaps, suggests that the probability of an interest rate hike next week is only 25%.
Many in the city had expected interest rates hike last month and were surprised when the Monetary Policy Committee put borrowing costs on hold.
Now, the first rate hike since the pandemic could move into 2022, despite inflation surpassing 4% and the job market looking relatively strong since the end of the vacation program.
Martin Beck, Chief economic advisor to the EY ITEM Club, he believes the MPC will likely resort to a rate hike next week:
The MPC defied market expectations in November by choosing not to raise the key rate. But current investor forecast that the committee won’t hike rates at the December meeting seems like a more reliable bet, and a look at EY ITEM Club stock.
Omicron’s new COVID-19 variant made the MPC’s decision more difficult in December, he explains:
The immediate and immediate impact of discovering the new variant – a drop in oil and other commodity prices – means that inflationary forces are no longer all pointing upwards and the variant poses numerous other challenges for economic recovery.
New restrictions around the world threaten to hamper supply chains even more, while consumers and businesses can reasonably expect more cautious spending policies.
Admittedly, if the new variant exacerbates delivery bottlenecks, the result could be even greater inflationary pressure. But, as is the case with the global forces that have driven inflation higher in recent months, tighter monetary policy would not counter price pressures from a renewed COVID disruption. If Omicron’s economic impact turns out to be greater than expected, a rate hike in the December meeting may need to be quickly reversed.
Raffi Boyadjian, Senior Investment Analyst at XM, also believes rates could remain suspended until February 2022 due to the new measures announced yesterday evening.
While the new guidelines are nowhere near as strict as the recent restrictions imposed in many other European countries, the UK comes from a place with near-zero Covid rules, so economic growth is likely to be slightly affected.
More importantly, given the potentially weaker economic backdrop, the Bank of England may be less confident of hike rates next week. The money markets have priced out the chances of a rate hike in December following yesterday’s announcement and are now expecting a start in February.
This also keeps the pound below $ 1.32 near today’s one-year low against the US dollar on Wednesday.
The pound is its weakest against the dollar in about a year. UK 2-year yields plummet as more traders bet that the Bank of England will postpone a rate hike again due to the Omicron threat. https://t.co/rEdtCUSUdC pic.twitter.com/Y6sE6E9eKP
December 9, 2021
A Reuters poll of City economists conducted this week found that 25 expected bank rates to stay at 0.10% next week, while 21 predicted a rise to 0.25%.
Last week, MPC member Michael Saunders, who voted for a rate hike last month, said he wanted more information on the implications of the new Omicron coronavirus variant before deciding how to vote this time.