The BOE surprised the market in two consecutive months. After failing to deliver rate hike in November, the members surprisingly increased the Bank rate by +15 bps to 0.25% in December. Concerns over elevated trumped Omicron variant uncertainty. British pound rallied against US dollar and the euro.
The members voted 8-1 to increase the Bank rate to 0.25% from a record low of 0.1%. They also voted unanimously to keep the QE program at 895B pounds. The unexpected rate hike is mainly driven by the heightened inflation pressure. The latest inflation figure suggests that headline CPI jumped to a decade’s high to +5.1% y/y in December, up from +4.2% a month ago. Core CPI also accelerated to +4% y/y from October’s +3.4%. As noted in the statement, the rapid increase in inflation over the past few months has triggered “the exchange of open letters between the Governor and the Chancellor of the Exchequer”. The central bank noted that “relative to the November Report projection, there has been significant upside news in core goods and, to a lesser extent, services price inflation”. The members expect “inflation to remain around 5% through the majority of the winter period, and to peak at around 6% in April 2022, with that further increase accounted for predominantly by the lagged impact on utility bills of developments in wholesale gas prices”..
The members remained confident over the job market despite the end of the furlough scheme. They acknowledged that “the labour market is tight and has continued to tighten, and there are some signs of greater persistence in domestic cost and price pressures”. They added that “although the Omicron variant is likely to weigh on near-term activity, its impact on medium-term inflationary pressures is unclear at this stage”.
The rate hike indicates that the central bank has prioritized combating strong inflation. They are confident that the job market and economic recovery would remain firm despite short-term headwind of the resurgence of the pandemic. Given the move this month, we do not expect there will be another rate hike in February.
Written by Admin
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