A passageway near the Bank of England (BOE) in the City of London, U.K., on Thursday, March 18, 2021.

Hollie Adams | Bloomberg | Getty Images

LONDON — The International Monetary Fund has urged the Bank of England to avoid “inaction bias” as it gears up for a key vote Thursday on when to hike interest rates in the face of high inflation.

The Bank’s Monetary Policy Committee surprised markets in November by voting 7-2 to keep its benchmark interest rate at its historic low of 0.1%. Governor Andrew Bailey acknowledged that the “warning signs are there” on inflation, but said policymakers would need to see more data from the labor market to assess the effects of the country’s furlough scheme before tightening policy.

Fresh data on Tuesday indicated that the labor market remained strong in November, with 257,000 staff added to payrolls, but the threat of the omicron variant at the end of last month has since thrown the central bank another curveball.

In its concluding statement on Tuesday following a recent staff visit to the U.K., the IMF said the MPC “has the tools to address volatility including discretion to manage the path of inflation back to its targeted level” of 2%.

“However, it would not be a simple matter to see through extended shifts in relative wages and prices while keeping expectations anchored,” the IMF report said.

“It would be important to avoid inaction bias, in view of costs associated with containing second-round impacts.”

Since the emergence of the omicron variant, some economists now expect the MPC to wait until February before pulling the trigger on its rate-hiking cycle. However, the market had priced in a 15 basis point hike at the November meeting, meaning any further delay could add to volatility.

The U.K. Consumer Prices Index rose by 4.2% in the 12 months to October, its sharpest incline for a decade and up from 3.1% in September. The Bank of England expects inflation to peak at 5% in the spring of 2022 before pulling back toward target by late 2023, as the impact of spiking oil and gas prices fades and goods demand moderates.

Markets on tenterhooks

Hugh Gimber, global market strategist at JPMorgan Asset Management, said Tuesday’s labor market report would likely have been enough to convince the MPC to hike rates on Thursday, had it not been for the omicron variant.

The U.K. Health Security Agency has estimated that new omicron cases are running at 200,000 per day, far exceeding the country’s official figures.

“The unemployment rate is grinding lower, while record demand for workers continues to put upward pressure on wages. Add in inflation data that is expected to hit a 10-year high tomorrow, and it is evident that interest rates at 0.1% are no longer appropriate for the UK economy,” Gimber said.

“Sadly, Covid-19 is yet again confusing matters. With Omicron posing near-term risks to the growth outlook, and still much to learn about the real-world efficacy of vaccines, we expect policymakers to instead opt to keep rates on hold this week in the hope that the outlook has become clearer by February.”

There is still divergence among strategists, however. Despite the additional uncertainty fueled by the omicron variant, BNP Paribas Chief European Economist Paul Hollingsworth continues to expect the MPC to lift off by 15 basis points on Thursday.

“We think the majority of the Committee will be persuaded by the economic data, which clearly justify the start of the tightening process, in our view,” he said in a note last week.

“Regardless of whether the MPC goes next week, the bigger picture for us is that markets are still pricing too steep a pace of hiking next year.”

Source link


Please enter your comment!
Please enter your name here