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Round 2: Will the Bank of England hike this time?

Economy1 hour ago (Dec 16, 2021 09:40)

© Reuters.

By Samuel Indyk – The Bank of England is set to announce its latest decisions on monetary policy on Thursday and there is still a great deal of uncertainty surrounding the decision.

The policymaking Monetary Policy Committee is mostly expected to keep the Bank Rate unchanged at 0.1% despite an improving labour market and surging CPI.

Communication Problem?

Leading up to the meeting last month, the central bank had appeared to signal that interest rate hikes were coming which led to markets pricing in that scenario. However, the BoE refrained from lifting the interest rate from the record low as Governor Andrew Bailey said they wanted more information on how the labour market would evolve after the end of the government’s furlough scheme.

The end of the scheme has not had an obvious impact on the labour market, with the unemployment rate recently falling to 4.2% and the employment rate rising to 75.5%, up 0.2 percentage points from the previous quarter.

Meanwhile, inflation, as measured by CPI, surged to 5.1% in November, the highest in over a decade.

However, despite the increasing inflation and improving labour market, the BoE is not expected to hike the interest rate today.  

The rapidly spreading Omicron variant is likely to keep the central bank from acting to curb inflation.

“At present, given the new Omicron COVID variant has only been detected quite recently, there could be particular advantages in waiting to see more evidence on its possible effects on public health outcomes and hence on the economy,” BoE policymaker Michael Saunders said in a speech on 3rd December.

Saunders voted to lift the interest in November alongside David Ramsden, although the two were outvoted by the other seven members of the Committee.

“Overall, the case remains for the need for “some modest tightening” over the forecast period,” Lloyds Bank analysts said. “However, uncertainties about the health and economic impact of the Omicron wave suggest that the MPC may opt to wait for more information before deciding whether to increase the cost of borrowing, but the decision is still likely to be finely balanced.”

Market Pricing

Following November’s CPI print on Thursday, interest rate futures were pricing in around a 60% chance of a rate hike. Prior to the data. markets had been pricing in a less than 50% chance of a rate hike.

Round 2: Will the Bank of England hike this time?

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