Will Omicron derail a potential pre-Christmas interest rate hike? Covid variant could influence Bank of England’s December decision
The emergence of the Omicron variant of Covid-19 has clouded the outlook for the Bank of England’s 16 December interest rate decision, and a much anticipated hike may now be delayed until next year, market experts suggest.
Traders and analysts had been confident of a 15 basis point rate hike to 0.25 per cent with pressure on the bank to get a grip on soaring inflation, which hit a decade high in October.
But the Bank of England may now hold off until next year to increase interest rates amid an as-yet unknown economic impact of the Omicron variant.
Markets no longer expect the Bank of England to hike interest rates on 16 Desember
Laith Khalaf, head of investment analysis at AJ Bell, said the Omicron variant had ‘punctured expectations of a Christmas rate hike’, with markets now expecting the rise will occur in February instead.
Hy het bygevoeg: ‘The emergence of the Omicron variant has now crystalised fears that we’re not out of the woods just yet as far as the pandemic is concerned, and led to a shift in monetary policy expectations.
‘The oil price has fallen back, and gilt yields have dropped significantly, reflecting fears that Omicron may spell trouble for the global economy.’
Senior market analyst at IG Joshua Mahony agreed that expectations of a December BoE rate hike ‘have largely gone out the window for now, with little chance we are going to see the [Monetary Policy Committee] tighten policy if this strain does result in another bout of lockdowns’.
The BoE’s chief economist Huw Pill acknowledged on Friday that the latest strain of Covid-19 and any reintroduction of government restrictions as a result ‘clearly would change our view of the world’, describing the emergence of Omicron as ‘a punch in the face’
The impact of the emergence of Omicron on policy outlook is not limited to the BoE, with markets now no longer pricing a 2022 hike for either the US Federal Reserve or the European Central Bank.
Deputy chief investment officer at Richard Bernstein Advisors Dan Suzuk explained the new variant is likely to place even more strain on supply chain disruptions, which have been impacted economies around the world in recent months.
Hy het gesê: ‘The market had started to look forward to easing supply chain disruptions, but a vaccine-resistant variant would certainly mean those disruptions will persist much longer.
‘This would put central banks in the very difficult position of having to choose between supporting growth and employment, or fighting against uncomfortably high inflation.’
Group chief economist at AXA Investment Managers Gilles Moëc said that the ‘room for manoeuvre differs’ for the Fed and the ECB, with the former having benefited from the ‘flexibility’ it has demonstrated in recent months.
Hy het verduidelik: ‘[Fed chair] Jay Powell must feel pleased with his absolute refusal to get dragged into a discussion of the likely timing for the lift-off [of interest rates].
‘The market was pricing a move next summer, but the Fed would not lose face nor credibility if it nudged towards a 2023 pricing.
‘[Maar] things are more binary for the ECB since it is expected to tell us at the next Governing Council meeting on 16 December if and when the Pandemic Emergency Purchase Programme is terminated, and if and when the Asset Purchase Programme (APP) is recalibrated.
‘An update on the forward guidance – on the link between the timing of the termination of [the Asset Purchase Programme and the first rate hike – is also due. Decisions were always going to be difficult in a very divided council.
‘The uncertainty created by the new variant adds another layer of complexity.’