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MNI STATE OF PLAY: BOE Hikes As Inflation Heads To 6%

(MNI) LONDON

The Bank of England delivered a 15-basis point hike at its December meeting, acting on its November promise that a hike was likely 'in coming months'. With Bank staff predicting that headline CPI inflation will peak around 6% in the spring, triple the Monetary Policy Committee's target, policymakers voted 8-1 to increase rates now and not wait for a February decision.

Market participants had responded to the likelihood of a large new wave of Covid infections due to the Omicron variant by lowering the odds on a December hike to around 1 -in-5, but MPC members were scrupulous following the November guidance in offering no steer that a rate increase would be delayed and in the event they backed the December rise, as MNI's latest BOE Insight piece highlighted (MNI INSIGHT: BOE Meeting Live To Consider Hike Despite Omicron).

There had been some speculation BOE Governor Andrew Bailey wanted strong support for this first hike and, after only two members backed an increase in November, the committee was firmly behind this move.

INFLATION SPIKE

Research suggests that business and consumer inflation expectations are influenced by current inflation and the vertiginous ascent in headline UK inflation has surprised policymakers and Bank economists now expect it to climb higher still.

The rise in CPI to 5.1% y/y in November topped the Bank’s 4.5% outlook in the November Monetary Policy Report and the December minutes revealed that Bank staff now expect “inflation to remain around 5% through the majority of the winter period, and to peak at around 6% in April 2022.” For a central bank aiming for a 2% inflation target those numbers highlight the risks the Bank would have run if it failed to walk the walk and deliver a hike.

COVID CONCERNS

On Omicron itself, the MPC was agnostic. While previous Covid waves have proven to be inflationary and to have had diminishing hits to activity, as businesses and consumers learned to deal with the restrictions, MPC members raised questions over how far this pattern would repeat itself.

While Omicron could increase “inflationary pressures further,” in part by delaying the rebalancing from stronger goods consumption to services and increasing supply chain disruptions, it could also deliver a more substantial hit to consumer confidence and economic activity if it does turn out to be partially vaccine-resistant.

In the absence of a new forecast round updating the inflation projections against market rate expectations, the December hike and commentary in the minutes offered little clear steer on the likely timing of the next rate increase.

MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com

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