BOE Policy Call Pits Omicron Against Inflation: Decision Guide

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The Bank of England on Thursday will decide whether to pull the trigger on its first interest rate increase since the pandemic began, weighing a surge in inflation against a surge in coronavirus infections.

After delaying a hike in November to wait for more information about the labor market, discussion has turned toward the risks that the omicron variant of the virus may overwhelm a sputtering economic recovery. Data since the last decision suggest strong upward pressure on wages and consumer prices.

Inflation jumped to 5.1% in November, which is more than double the central bank’s target. A separate report showed U.K. companies added to payrolls at a record pace. Meanwhile, Prime Minister Boris Johnson warns a “tidal wave” of Covid cases is coming.

The combination of those factors has left investors divided about the chances of a 15-basis-point rate rise on Thursday, a move that just a month ago seemed almost certain. Economists are more convinced the key rate will stay on hold, with 34 of 42 respondents to a Bloomberg survey predicting no change.

What Bloomberg Economics Says..

“For the second meeting in a row, the Bank of England’s policy decision is on a knife edge. The data say hike. Uncertainty about the omicron variant says hold. We think the latter argument will probably hold sway among the majority of the Monetary Policy Committee. Provided that the public health consequences of omicron can be contained without causing significant damage to the recovery, a rate hike is likely in February.”

--Dan Hanson, Bloomberg Economics. Click for the full PREVIEW.

Still, any inaction is likely to prove very temporary. Most observers expect the BOE to now move in February, potentially with an even bigger hike, should the threat from omicron recede.

The announcement is due at noon in London, Here are more details on what to expect:

• The BOE decision will be accompanied by minutes of the meeting, but there is no press conference scheduled.
• A repeat of November’s 7-2 vote to hold the benchmark at 0.1% was the most popular forecast for the vote split among economists.
• In a sign of the uncertainty about the outlook, splits of 9-0, 8-1 and 6-3 were also predicted by some in the survey. Those seeing a hike expect a 6-3 decision in favor of such a move.
• Officials may also comment on the end of the BOE’s quantitative easing plan, which wrapped up on Wednesday. The buying has left the central bank’s holdings of government bonds at 875 billion pounds ($1.2 trillion), from 435 billion pounds before the pandemic hit.

Read More:

• Delayed U.K. Rates Lift-Off May Trigger Faster Rises Later
• U.K. Inflation Tops 5%, Fastest in a Decade, as BOE Meets
• U.K. Gilts Market Braces for the Departure of Its Biggest Buyer
• IMF Urges BOE and U.K. Treasury To Tackle Inflation Risks
• Omicron Makes BOE’s December Rate Increase Anything But Certain

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