Omicron Variant Increases Uncertainty for Bank of England Rate Decision

Strategic Insights -

The emergence of the new Omicron variant of the coronavirus has significantly increased the likelihood of the Bank of England holding back from raising interest rates this month. Economists and traders in financial markets expect a majority of members on the BoE's Monetary Policy Committee 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.

Key Takeaways:

  • Economists expect a majority of MPC members to decide to leave interest rates unchanged at 0.1 per cent due to increased uncertainty caused by the Omicron variant.
  • Analysts predict that the BoE will prioritize cautious approach to ensure the economic recovery remains strong amid high inflation.
  • Despite strong labour market data, economists believe that the negative impact of Omicron on gross domestic product will be modest.
  • Traders have scaled back expectations for tighter monetary policy, with forward interest rates for early January indicating a low expectation of policy being tightened this month.
  • Economists such as Yael Selfin, Robert Wood, and Karen Ward are skeptical of the BoE's ability to resist waiting for more information before raising rates.
  • The outcome of the MPC's December meeting is uncertain, with some economists thinking it's too early to make precise predictions about future monetary policy.

Statistics:

  • 0.1%: The expected interest rate at the December meeting if the MPC decides to leave rates unchanged.
  • 4.2%: The October consumer price index rise from a year earlier, as inflation reached its highest level in almost a decade.
  • 0.15 percentage points: The expected rise in interest rates predicted by David Owen of Saltmarsh Economics.
  • 100: The level of the monthly GDP index in 2019, which represents the upswing in economic activity post-pandemic.
  • 959: The level of the monthly GDP index in 2020, which shows a severe recession during the first wave of the pandemic.
  • 1.4: The forward interest rate for November.
  • 1.0: The forward interest rate for May and August.
  • 0.8: The forward interest rate for May in 2020.

Sources:

  • CHRIS GILES, economics editor, "Bank of England to hold interest rates steady amid Omicron fears".
  • Yael Selfin, economist at KPMG, quoted in the article.
  • Robert Wood, economist at Bank of America, quoted in the article.
  • Karen Ward, chief European market strategist at JPMorgan Asset Management, quoted in the article.
  • Ruth Gregory, economist at Capital Economics, quoted in the article.
  • David Owen, economist at Saltmarsh Economics, quoted in the article.
  • Steffan Ball, economist at Goldman Sachs, quoted in the article.
  • Official data from the Bank of England and the UK Office for National Statistics.
  • Financial markets and traders.