The BoE will be the first major central bank to raise interest rates since the pandemic

LONDON, December 16 (Reuters) – The Bank of England on Thursday became the world’s first major central bank to increase borrowing costs since the coronavirus pandemic hit the global economy, saying inflation is likely to reach 6% in April – three times the target level.

As a new surprise for investors in six weeks, the BoE said it would have to act, even though the Omicron coronavirus variant is sweeping the UK, because it saw warning signs that underlying inflationary pressures could be prolonged.

“The labor market is tight and has continued to tighten, and there are some signs of greater persistence in domestic cost and price pressures,” the BoE said.

“Although the Omicron variant is likely to weigh on short-term activity, its impact on medium-term inflationary pressures is unclear at this stage.”

Sterling jumped almost a full cent against the US dollar to its highest level since November 30, and interest-sensitive two-year gold rates rose by 9 basis points a day to 0.58%, the highest since December 1.

Most economists asked by Reuters had expected the BoE’s Monetary Policy Committee to keep bank interest rates at 0.1% due to the Omicron variant of the coronavirus that caused a record number of COVID-19 cases in the UK on Wednesday.

“MPC’s decision to raise bank rates today, before it knows the full extent of the economic damage caused by the growing Omicron variant, underscores how concerned it is about the outlook for inflation and the risk that inflation expectations would anchor if it did. , “said Pantheon Macroeconomics analyst Samuel Tombs.

MPC with nine members voted 8-1 to raise the bank rate to 0.25% from 0.1%, with external member Silvana Tenreyro as the only dissenting vote.

MPC pointed to the probability of further interest rate increases in the future.

“The Committee continues to assess that there is a bilateral risk to the inflation outlook over the medium term, but that some modest tightening of monetary policy over the forecast period is likely to be necessary to achieve the 2% inflation target in a sustainable manner.” so.

Investors fully priced a new rise in bank interest rates to 0.5% by the March meeting, and that it would reach 1% by September.

SHORT-TERM OMICRON HIT SET

The BoE cut its growth forecasts for December and the first quarter of 2022 due to Omicron which could lead to “a very high number of infections over a very short period of time.”

A closely monitored survey of purchasing managers published earlier on Thursday showed a hit for hospitality and travel companies this month, sending private sector growth to a 10-month low. read more

But the BoE also said that the UK and the world economy were in a “materially different” situation than at the start of the pandemic, with inflation now rising.

It focused more on “upside risk” around wage trends and said there was little sign of a jump in unemployment after the end of the government’s job-supporting leave scheme on 30 September.

The Bank of England also misjudged many investors on November 4 when it kept Bank Rate on hold to give itself more time to see the extent of any hits in the labor market from the end of the scheme.

At its December meeting, the MPC voted 9-0 to keep the central bank’s program of buying government bonds at the target size of 875 billion pounds (1.16 trillion dollars). The BoE has also bought £ 20 billion worth of corporate bonds.

Thursday’s rise in interest rates put the BoE ahead of the US Federal Reserve. On Wednesday, the Fed said it was speeding up a phasing out of the stimulus for bond purchases, in a first step ahead of possibly three interest rate hikes in 2022. read more

The European Central Bank and the Bank of Japan are further away from raising borrowing costs.

On Thursday, the ECB cut its stimulus further, but promised generous support for the eurozone’s economy in 2022.

Reporting by David Milliken and Andy Bruce; Written by William Schomberg; Edited by Hugh Lawson

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