Hawkish Bank of England interest rate setters warn Omicron may postpone tightening policy
The Bank of England’s hawkish interest rate setters said that the Omicron coronavirus variant has increased uncertainty about the economic outlook, which means there is an “advantage” in waiting for more information before tightening monetary policy.
The cautious attitude of Michael Sanders, an external member of the Monetary Policy Committee, has strengthened some economists’ expectations that the Bank of England will maintain its policy rate at 0.1% at the upcoming December meeting.
Speaking of the timing of raising interest rates, Sanders said in a speech on Friday: “At present, given the new Omi Kron The Covid variant has only recently been discovered, waiting for more evidence to prove that it may have an impact on public health outcomes, and thus on the economy, which may have particular advantages. “
Sanders was one of two members of the nine-member committee that voted to raise interest rates to 0.25% at the last meeting. Investors are paying close attention to whether policymakers in many advanced economies such as the United States and the Eurozone are showing signs of raising interest rates in response to inflation that has soared well above the target.
Sanders stated that at the December 16 meeting, his “key considerations” “will be the possible economic impact of the new Omicron Covid variant, as well as the potential costs and benefits of waiting to see more relevant data. -If necessary-adjust the policy”.
Andrew Goodwin, an economist at Oxford Economic Consulting, said his speech showed that “his basic views are still hawkish, but there is a slight increase in uncertainty in Europe and the United States.”
Goodwin added that the December meeting was “in danger” because the intensity of the incoming data conflicted with news of the new variant. Goodwin said: “Unless we learn about Omicron in the next two weeks, we think most people will be keen on a temporary suspension.”
Similarly, traders now believe that the probability of raising interest rates next month is about one-third, and before Sanders’ comment, the probability is slightly less than 50%. Before the Omicron variant, the probability of a rise in December was about 75%.
However, Sanders also warned that continued delays in tightening monetary policy “may also be costly.” He explained that if the economy continues its recent trend, maintaining the current highly accommodative policies may lead to further tightening of the labor market and aggravate the risk of further rise in long-term inflation expectations.
“This may require a more sudden and painful policy tightening later,” he explained.
Sanders is tougher on inflation. The bank expects that inflation will peak at 5% in the spring and then slow down. The outlook faces two risks. However, Sanders said: “The balance of these risks is more upside than downside.”
Compared with bank forecasts, a “major upside risk” comes from the possible greater loss of excess savings accumulated by households during the pandemic, which has now reached 250 billion pounds, accounting for 17% of annual consumer spending.
He also said that, in his view, there are a series of risks, indicating that “the inflation target will continue to exceed 2%”, including stronger potential salary growth.
He said that the bank expects salary growth to slow in 2022, but due to fewer EU workers, declining labor force participation and strong recruitment, “in my opinion, salary transactions are more likely to pick up in the next year.”
Additional report by Tommy Stubbington