Bank of England warning: Likely interest rate hikes could be stalled due to Omicron
Interest rates ‘need to rise and will rise’ says Andrew Bailey
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Speaking today in an online webinar external MPC member Michael Saunders said that if the economy developed inline with the Bank’s Monetary Policy Report (MPR) forecasts “The direction of travel for the Bank Rate during the next few quarters is clearly likely to be upwards.” Mr Saunders revealed at the November meeting he voted for an increase in the Bank rate to 0.25 percent. He added: “If the economy develops as I expect, then some additional tightening, on top of such a move, probably will be needed fairly soon.” However he expressed caution over the need to factor in new data around the Omicron variant, reminding that policy would not be “on auto pilot.”
He explained: “The pace, and scale, of any monetary policy changes will depend on economic developments and the outlook.
“In particular, at the December meeting, a key consideration for me will be the possible economic effects of the new Omicron Covid variant, and the potential costs and benefits of waiting to see more data on this before – if necessary – adjusting policy.”
The Bank has previously stressed the need for caution before acting on rate changes.
Last month expectation had grown considerably for a rate rise however in a surprise turn the MPC decided to wait, in part due to wanting to see greater data on the labour market.
While conceding there could be “advantages in waiting to see” Mr Saunders warned “delay could be costly” and require a “more abrupt and painful policy tightening later”.
He described short-term rises as “a case of easing off the accelerator rather than applying the brakes”.
If the economy progresses as per the Bank’s forecasts Mr Saunders warned: “Risks are on the side of a more persistent period of excess demand and above-target inflation, reflecting greater domestic cost and capacity pressures.”
If the Bank increases rates it would most likely move up by 0.15 percent to reach 0.25 percent then up in intervals of 0.25 percent going forward.
At November’s meeting one other member voted with Mr Saunders to increase rates with the other seven voting to hold interest rates at 0.1 percent.
Looking to the state of the UK economy Mr Saunders described how inflation was now growing around the highest pace in the last 20 years.
In 2020 inflation actually dipped due to weakened demand from the pandemic but this year it has risen from below two percent to 4.2 percent.
Mr Saunders said household disposable income could be “squeezed by high inflation in the near term” as well as a slowdown in growth in weekly wages.
If wholesale gas price rises didn’t reverse he predicted they would feed through to a “sizeable” increase in Ofgem’s price cap in April.
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The Bank’s current MPR forecasts predict inflation will peak at around five percent in the second quarter of next year and then begin to fall back to the two percent target in the three years ahead.
Global goods are forecast to begin falling in price in the coming months as supply chain issues start to ease.
All of the Bank’s predictions are based on the assumption though of no new severe Covid related restrictions or lockdowns.
Mr Saunders said these were “reasonable assumptions” but added they are “uncertain” in light of the new Omicron variant.
The Bank will next review interest rates on the 16th December.
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