Impact of new variant of Covid expected to delay interest rate hike

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Thursday’s Monetary Policy Committee (MPC) meeting will vote on whether to raise rates from the 0.1% level they have been at since March 2020. In November, members voted 7-2 for no rate change and 6-3 to exit QE. unchanged. This week’s vote comes amid a wave of economic announcements, including the latest inflation and unemployment figures.

Luke Bartholomew, senior economist at Edinburgh-based investment group Abrdn, has said he expects the Bank to keep its policy on hold.

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“This is a finely balanced call given the conflict between risk management considerations and solid labor market data,” he said.

The Bank of England is expected to keep interest rates unchanged this week, but the vote is expected to be close. Photo: Léon Neal / Getty Images.

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“Overall, we believe the Bank will prefer to wait for more information on the severity of the variant and the durability of the restrictions before tightening its policy at its February meeting.”

Mr Bartholomew still expects the bank rate to reach 50 basis points (bps) in May and 75 bps by the end of 2022. The impact of this supply shock could end in l outweigh the impact on demand, which would put further upward pressure on inflation. “

Danni Hewson, financial analyst at AJ Bell, said that under normal circumstances, an environment where gross domestic product growth is expected to reach at least 6 percent, inflation is well ahead of the 2 percent target and unemployment is only 4.3 percent. cent, an interest rate of 0.1 per cent “would not make sense.”

She added: “Data distortions have caused the pandemic, lockdowns and their continued effects on consumer and business behavior make policymaking more difficult, and at the moment the BoE appears more concerned about the danger. posed by unemployment than by the danger posed. by inflation.

“The US Federal Reserve, however, appears to be changing its tone and it will be interesting to see if the BoE does the same.”

Forecasts

In a poll of economists by Reuters, 25 expected the rate to remain unchanged next week, while 21 expected an increase to 0.25%. The previous month had seen a split, with 26 in favor of a hike versus 21 expecting no change.

This week will also see the release of other key data on the economy.

The Office for National Statistics will release the latest unemployment and wage growth figures. The latest figures for the three months ending September showed the employment rate to be a historically high 75.1 percent and wage growth to be 5.8 percent including bonuses.

On Wednesday, the latest inflation data for November will be released. The aggregate consumer price index rose 4.2% year-on-year in October, the fastest increase since December 2011.

Ms Hewson said the relationship between unemployment, inflation and wage growth is critical for consumers and one that the BoE should carefully monitor and manage, given the UK is a consumer-driven economy.

“If unemployment or inflation start to gallop, consumers quickly feel the pinch one way or the other, and as such central banks have a difficult balance to strike.”

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