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Receding investor bets on a December hike by the BOE have come despite no change in guidance that higher interest rates are coming.
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Investors are betting that a December rate hike by the Bank of England has become much less likely since the emergence of Covid’s Omicron variant, but guidance for an increase “over coming months” remains in place, while Monetary Policy Committee members have avoided giving any steer as to whether they are more likely to act at next week's meeting or in February.
Markets are pricing an approximately 30% chance of a hike to 0.25% at the next meeting, down from over 50% before the discovery of the new variant. But such a dramatic price move, so soon after investors got ahead of themselves with bets on a November hike (see MNI INSIGHT: Rates Pricing Races Ahead As BOE Sticks To Script), is hard to square with commentary from the MPC, whose members have made clear that all meetings are now “live”.
And Omicron does not, so far, appear to be a game changer, with other Covid waves having tended to be more inflationary, and to hit economic activity less hard, than previously assumed.
In a speech on Wednesday, Deputy Governor Ben Broadbent highlighted pressures from a tight labour market, warning that these could have a more enduring inflationary effect than increases in goods prices. He refused to give any guidance as to the month in which the first hike was most likely to come but referred to November projections showing inflation overshooting its target if policy is unchanged.
FURTHER LABOUR MARKET TIGHTENING
Broadbent, chief economist Huw Pill and independent MPC member Michael Saunders all stressed in recent speeches that the labour market has not eased despite the termination of the furlough scheme at the end of September. Uncertainty as to the effect of the end of furlough had been a reason MPC members used for delaying tightening in November, but employment conditions appear, if anything, to have tightened further, with no decline in vacancy numbers and no rise in worker availability.
Pill said the balance of proof had shifted and that he needed to see fresh evidence against a hike, while Saunders, who voted for a 15-basis point hike in Bank Rate to 0.25% at the November meeting, quipped that "If it wasn't for Omicron you could probably guess what the direction of my policy vote would be.” Neither of these comments, though, departed from the recent MPC strategy of avoiding headlines of the sort that excited the market in November, and to repeat that tightening is likely needed without tilting the scales towards a particular month.
While news of Omicron is still fresh, with Broadbent pointing to open questions over its virulence and susceptibility to vaccines, previous Covid waves have tended to increase relative demand for goods rather than services, and to add to supply chain disruptions. It is possible that it causes job losses following the end of furlough, but it would have to break the pattern of previous waves for it to ease concerns over overshooting the target for inflation, which the BOE currently expects to hit 5% in the spring.
Far more will be known about Omicron by the time of the February meeting. However, if it causes significant disruption, the extent of any the fiscal response in not only the UK, but also in the U.S. in particular, might still be unknown, leaving the overall level of uncertainty high.
The MPC has yet to have its discussions for the December meeting.