The Bank of England became the world’s first major central bank. They have raised the interest rates since the pandemic hammered the global economy. Also, they warned inflation was likely to hit 6% in April. The BoE said that it had to act now. This is even as the Omicron coronavirus variant sweeps Britain. Because it saw warning signs in underlying inflation pressures.
The nine-member Monetary Policy Committee voted 8-1. This is to raise Bank Rate to 0.25% from 0.1%. The external member Silvana Tenreyro provides the only dissenting voice. Governor Andrew Bailey said that Omicron was already hurting retailers and restaurants. But the BoE had felt compelled to stop the recent jump in prices from becoming a longer-term problem. Bailey said that we are concerned about inflation in the medium term. They are now seeing things that can threaten that. This is why they have to act.
He also added that it was unclear whether Omicron would ease or add to inflation pressure. Sterling jumped almost a full cent against the U.S. dollar. The interest-rate sensitive two-year gilt yields rose by as much as 9 basis points on the day to 0.58%. The BoE pointed to the likelihood of more modest tightening of monetary policy over its three-year forecast period. This is although inflation could prove weaker or stronger than expected. Investors rushed to fully price in another rise in Bank Rate to 0.5% by March and to 1% by September.
The British central bank also wrong-footed many investors on Nov. 4. The rate hike put the BoE ahead of the U.S. Federal Reserve which stated that it was speeding up a phase-out of its bond-buying stimulus. This is in a first step ahead of possibly three interest rate rises in 2022. The European Central Bank and the Bank of Japan are further away from raising borrowing costs. The ECB had cut back its stimulus further but promised generous support for the euro zone’s economy in 2022.
The BoE cut its growth forecasts for December and the first quarter of 2022. This is because of Omicron which could lead to a very high number of infections over a very short period. A survey of purchasing managers earlier showed a hit to hospitality. Also, they travel companies, by sending private sector growth to a 10-month low. But the BoE also said that the Britain and the world economy were in a materially different situation than at the start of the pandemic, with inflation now elevated. It focused more on upside risks around pay trends. They also said that there was no sign of a jump in unemployment after the end of the government’s job-supporting furlough scheme on Sept. 30.
The BoE said that it now expected Britain’s unemployment rate to fall to around 4%. The rate stood at 4.2% in the three months to October. British employers have faced severe staff shortages this year. This is as the Brexit compounds, the loss of migrant workers caused by the pandemic last year. The MPC voted 9-0. And that is to keep the central bank’s government bond-buying programme at its target size of 875 billion pounds ($1.16 trillion). The BoE has also bought 20 billion pounds of corporate bonds.