Omicron seen trumping inflation for Bank of England this week

[LONDON] The Bank of England is set to opt for caution over Covid rather than worries about inflation, pushing back its first rate increase since the pandemic into 2022, according to economists.

With concerns over the Omicron variant pushing the UK economy back into tighter restrictions, officials will keep interest rates at a record low when they meet this week, the majority of analysts in Bloomberg survey said.

A similar poll last month indicated a hike was expected. A repeat of November's 7-2 vote to hold the benchmark at 0.1 per cent was the most popular forecast, although, in a sign of the uncertainty about the outlook, splits of 9-0, 8-1 and 6-3 were also predicted. Those seeing a hike foresaw a 6-3 decision in favor of such a move.

It means economists are in sync with markets, where current pricing implies a less than 40 per cent chance of an increase, down from close to 100 per cent at some points last month.

Both see liftoff coming in February, making the BOE the first major central bank to raise the cost of borrowing. The shift is the latest twist in a tumultuous few months for BOE watchers, with markets and economists regularly forced into changing their actions by a slew of sometimes contradictory data, central bank communication and covid developments.

At the end of the summer, few thought the BOE would make any moves in 2021, only for a jump in inflation and hawkish comments from key officials to whip up expectations that a tightening was coming in November.

But despite predicting that consumer prices will be rising by 5 per cent a year come April, more than double the BOE target, officials chose instead to wait for more information on the state of the labor market following the end of the government's job-supporting furlough programme.

With no evidence of any rise in unemployment and labor shortages pushing up pay, economists and investors had Dec 16 penciled in for a hike until the emergence of the omicron variant cast renewed doubt over the outlook. The tide then turned quickly. Even before Prime Minister Boris Johnson announced new restrictions to contain the spread of the new strain, the Monetary Policy Committee's most hawkish member, Michael Saunders, said there was a case for waiting for clearer data on omicron's impact before acting.

BLOOMBERG