Bank of England now expected to raise rates in Q1, but Dec a close call: poll

[LONDON] The Bank of England will wait until early next year before raising borrowing costs, later than previously expected, as it awaits further information on the economic impact of the new Omicron coronavirus variant, a Reuters poll found.

In a November poll, a slim majority of economists expected a rise from 0.10 per cent to 0.25 per cent on Dec 16. But since then policymaker Michael Saunders, who voted for an interest rate hike last month, said he wanted more details about the new variant before deciding how to vote this month.

"While the Dec 16 meeting has looked like an incredibly close call at times, we think the MPC will vote unanimously to keep rates on hold, amid the considerable uncertainty around the Covid-19 situation," said Elizabeth Martins at HSBC.

"One of the reasons we have been saying since the summer for why February is the earliest likely time for a hike is because of the risk of a winter wave of Covid-19 weighing heavily on economic activity."

Coronavirus cases in Britain, and across much of the world, have been rising and the government announced it would reimpose some restrictions late last month to try to contain the spread of the Omicron variant, which may be more resilient to vaccines.

Even tougher measures were introduced on Wednesday, after the polling was conducted, ordering people to work from home, wear masks in public places and use vaccine passes to enter venues with large crowds to try to slow the variant's spread.

Despite restrictions, the economy was still expected to expand 1.0 per cent this quarter but slow to 0.8 per cent next quarter and to 0.7 per cent in Q2. Across 2022 annual growth was put at 4.8 per cent and for 2023 it was 2.1 per cent

"Covid-19 cases will rise month-on-month in both December and January, keeping many households cautious. Near-real-time data continue to suggest Omicron already has dealt a blow to the consumer services sector," said Samuel Tombs at Pantheon Macroeconomics.

Last month, the Bank surprised markets, which had priced in a rise, by leaving interest rates on hold. Market pricing is now showing a roughly 50-50 per cent chance of a move this month.

In the Dec. 6-8 poll 25 economists said Bank Rate would be left at 0.10 per cent next week, while 21 predicted a rise to 0.25 per cent. In the November poll the split was 26 in favour of a hike versus 21 expecting no change.

Considering common contributors in this and the previous polls, a slim majority - 15 of 27 - still expected a hike this month.

But the first move is most likely to come in February when the Bank publishes its quarterly Monetary Policy Report and would be well ahead of the United States Federal Reserve - which is not expected to act until the third quarter - and other major peers.

When asked what was the biggest downside risk to the economy next year, 12 economists said coronavirus variants, while nine said high inflation. Others mentioned tighter monetary policy and Brexit.

Like its peers, Britain has seen prices soaring due to supply chain disruptions and rising energy costs.

Inflation hit a 10-year high of 4.2 per cent in October, more than double the central bank's 2.0 per cent target.

The latest Reuters poll predicted it would peak at 4.7 per cent early next year before moderating to 3.9 per cent in the third quarter and to 2.7 per cent in the last three months of 2022.

So the initial 15 basis point lift next quarter will be followed by a 25 basis point increase in May or June. Another 25 basis points will be added in the last three months of 2022, a quarter earlier than previously expected.

The biggest upside risk to growth next year was a tighter labour market and higher wages, according to 12 economists. Five said it was faster-than-expected growth.

REUTERS