A good week before the Bank of England (BoE) meeting, there is growing tension among economists and investors as to whether the central bank will raise the key interest rate in view of rising inflation rates.
At the beginning of autumn, inflation had already climbed to 4.2 percent.
It could rise “comfortably above 5 percent” next spring if the energy price cap is adjusted in April, says Fed Deputy Governor Ben Broadbent.
In a speech in Leeds this week, he emphasized that the tight labor market in particular means rising inflationary pressure.
If the London central bank raises the key interest rate from a previously record low 0.1 percent, it would be the first major central bank in the world. This could also put the European Central Bank under pressure to justify itself. In November the markets had already firmly assumed a London rate hike and bond prices had fallen significantly, but they were wrong. Federal Reserve Chairman Andrew Bailey then had to explain himself. He emphasized that the development depends on the labor market, and it looks strong. The shortage of staff in many companies points to rising wages.
But economists have now become cautious as to whether the BoE is actually turning the interest rate screw.
Many economists say the uncertainty about the economic impact of the Omikron virus variant will deter the majority of central bank committee members from raising the key rate by 0.15 points on December 16.
Interest rate hike comes with a delay
"The odds for a rate hike in December have fallen significantly, and the markets are now pricing in a 40 percent probability before Christmas," says Sanjay Raja, chief economist at Deutsche Bank in London. But he emphasizes how strong the British economy is. “The economic engine is on fire on almost all cylinders.” Inflation was several times higher than expected, and the labor market looks very strong, even after the state support program has ended. The sentiment indicators have also been better than expected recently, but they are likely to subside in the next few weeks.
Barclays Bank, which until recently believed in a rate hike, now expects the Bank of England to wait again. "The uncertainty generated by Omikron is now tipping the scales in favor of the status quo," says Fabrice Montagne, Barclays chief economist for the kingdom. "We still think that the central bank will raise interest rates, but they will wait until February," Montagne told the newspaper. "By May 2022, the key interest rate will then reach 0.75 percent after three interest rate steps, but the earth level will remain below 1 percent, contrary to what the market believes," he says.
The Berenberg Bank, however, is still betting on an interest rate hike before Christmas.
“Unless the pandemic situation in Great Britain comes to a head, the Bank of England will probably raise interest rates on December 16th.
The latest data on the economy and inflation speak for it, ”says Berenberg chief economist Holger Schmieding, who is based in London.
“Omikron could change the outlook,” he admits.
"But unlike in Germany, the hospitals and intensive care units in Great Britain are currently not at the overload limit."Keywords: