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Bank of England opt for inflation over omicron surge in rate hike: Analyst

Bank of England opt for inflation over omicron surge in rate hike: Analyst
Bank weighing surge in inflation against surge of new coronavirus cases with inflation winning day, expert says

By Ovunc Kutlu

ANKARA (AA) - The Bank of England (BoE) opted to take action against record inflation, despite a surge in omicron variant cases, in its decision to increase interest rates Thursday, according to an analyst.

"[The BoE's] decision has been a careful balancing act for the Monetary Policy Committee, who have been weighing a surge in inflation against a surge of new coronavirus cases," Giles Coghlan, Chief Analyst at London-based Forex and CFD Provider firm HYCM told Anadolu Agency via email.

"Clearly, inflation won the day," he said after the bank’s Monetary Policy Committee voted 8-1 to make its first rate hike in more than three years by increasing the interest rate to 0.25%, from a record low of 0.1%.

The UK’s annual inflation increased 5.1% in November, its highest level since September 2011, while the BoE forecasts inflation to hit 6% in April, three times its target of 2%, as it estimates inflation to moderate to that level in late 2023.

"Many traders had been predicting that an interest rate increase from the BoE wouldn’t be on the cards until February -- so today’s hawkish move from the central bank has caught the markets off-guard, with EURGBP down sharply on the release," Coghlan said.

The euro fell to as low as 0.8454 on Thursday against the British pound, from the previous close of 0.8507, and later recovered, climbing above 0.85, according to official figures.

"Overwhelmingly, economists had been predicting against an increase, but omicron fears and the triggering of ‘Plan B’ have not been enough to keep the BoE on the sidelines," Coghlan said.

The UK reported its highest virus figures for a second consecutive day with 88,376 cases Thursday, rising from 78,610 on the previous day.

"The omicron variant poses downside risks to activity in early 2022, although the balance of its effects on demand and supply, and hence on medium-term global inflationary pressures, is unclear," the BoE said in its Monetary Policy Summary. "The impact of the omicron variant ... will push down on GDP in December and in 2022 Q1.”

Coghlan said a rise in wages in the UK could have also played a role in the BoE's decision.

“The rise in wages this week have been a pressing concern to the central bank and may have prompted them to pull the trigger to contain wage growth. Bank staff continue to estimate that underlying earnings growth has remained above pre-pandemic rates, and the Committee continues to see upside risks around projection for pay in the November report," he said.

Record inflation in the post-pandemic period has forced central banks in major economies to take action on monetary policies in recent days.

Although the European Central Bank kept interest rates unchanged Thursday, it confirmed that it will end the pandemic emergency purchase program by the end of March.

The US Federal Reserve removed the word “transitory” from describing inflation on Wednesday, saying it will conclude tapering faster by doubling asset purchases, while it signaled three rate hikes for 2022 to tame record inflation.

source: News Feed
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