MNI STATE OF PLAY: BOE Leaves Dec Hike Live As Omicron Hits

Bank of England Monetary Policy Committee members have avoided giving any fresh policy steer in recent weeks, rendering both the December and February meetings live following November’s guidance that a hike would be “necessary over coming months.”

All the MPC members have signed up to the view that some tightening will likely to be needed to get inflation, expected to peak around 5% in the spring, back to its 2% target. The onset of the Omicron variant of Covid has persuaded analysts that a hike is unlikely this month although MPC members have said next to nothing to endorse this view.

Market pricing shows money markets are assuming that the Bank will raise its policy rate from its current 0.1% to around 1.0% by the end of 2022, also indicating that if the MPC does not move in December that it will only briefly postpone tightening to February.

The uncertainty around the impact of the Omicron variant is unlikely to have neatly disappeared in time for the February MPC meeting, with questions hanging over vaccine efficacy, booster rates, business and consumer confidence, how it impacts supply chains and what fiscal support, if any, the government will deliver to cushion its effects. MPC members have, so far, largely highlighted the unknowns while pushing back against the view that Omicron will be a deflationary shock.

Deputy Governor Ben Broadbent, a key figure at the Bank whose voting record shows him consistently voting with the majority, refused point blank in a De. 6 question-and-answer session to say if the spread of the Omicron variant made delaying a hike more likely while noting that the MPC did have evidence from previous Covid waves of its likely effects. These, as independent MPC Michael Saunders noted, can be inflationary, with supply chain disruptions and an increase in relative demand for goods adding to price pressures.

OMICRON

Saunders, along with Deputy Governor Dave Ramsden, voted for a hike at the November meeting. While some analysts placed weight on Saunders remarks that Omicron could change his vote he did nothing more than acknowledge the obvious that things could change if the pandemic news was dark enough.

The latest developments, notwithstanding the rapid growth of Omicron infections, have not so far brought the pessimistic scenarios of high fatalities and attendant lockdowns and speaking on Monday Governor Andrew Bailey downplayed the idea that it would turn into a major shock to financial markets.

The Bank is “monitoring it closely and, obviously, there is still a lot of news to come on Omicron in terms of what its medical symptoms are going to be and on vaccine efficacy … but I would say at the moment … that I don’t think we are in a situation where there is stress around the corner in terms of markets,” Bailey said.

Elevated inflation expectations and the MPC’s history of looking through inflationary shocks in the wake of sterling devaluations both at the onset of the global financial crisis and after the Brexit vote have left the BOE, unlike some other central banks, with no prolonged history of inflation undershoots that could be used to justify another price overshoot on an implicit inflation-averaging approach.

There is chatter that Bailey would prefer to have a large majority, or all, of the MPC on board when a hike is delivered but a swing back to a nine-to-zero vote in favour of no change in December, as some analysts have suggested might happen, would cloud the messaging when chief economist Huw Pill has said he wants the Bank to get back to its core task of inflation fighting.