Traders cancel bets on December rate rise as hawk voices doubts
MARKET traders no longer believe interest rates will be lifted this month after one of the Bank of England’s most hawkish officials said there was a case to “wait and see” how omicron affects the economy.
Michael Saunders, an external member of the Monetary Policy Committee, said the variant could offer reason for pause. He told a Bank webinar that “there could be particular advantages in waiting to see more evidence on its possible effects on public health outcomes and hence on the economy”.
Currency market positions on Thursday implied a 60pc chance of rate hike to 0.25pc on Dec 16; but after Mr Saunders’ comments yesterday, it dropped to 40pc. The pound fell 0.2pc.
However, Mr Saunders, who voted for a rise at the MPC’S November meeting, said “continued delay also could be costly”. The committee decided to hold rates last month in a 7–2 vote that surprised markets. He warned that keep- ing the cost of borrowing at ultra-low levels could risk exacerbating inflation and may “require a more abrupt and painful policy tightening later” to meet Threadneedle Street’s 2pc target.
The former Citi economist said any increase in the Bank rate was likely to be limited: “Provided we do not delay too long, it should be a case of easing off the accelerator rather than applying the brakes.”
Mr Saunders said it would not be sensible to give “precise forecasts” on the future path of rates, but added: “If the economy develops in line with the [Bank’s] central forecast or my expectations, the direction of travel for Bank rate during the next few quarters is clearly likely to be upwards.”
Omicron could still “significantly affect the economic outlook” even if the Government did not introduce any new restrictions, he said.
Consumer price inflation hit a 10-year high of 4.2pc in October amid severe supply chain disruptions and high energy costs. It is expected to increase further, with the Bank forecasting it will peak at about 5pc in April.
Mr Saunders’ comments came as survey data showed input price inflation for manufacturers hit a fresh high in November.
IHS Markit said companies faced another month of “rapid” cost increases, including higher wages and prices paid for energy and raw materials.
New orders increased at the fastest pace since June amid rising spending, according to purchasing managers, with companies hiring rapidly in response to demand and backlogs.