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Bank Rate increased to 0.25% despite Omicron fears

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UK inflation soared to 10-year high of 5.1% last month, and economists had widely been predicting a rate rise by the end of 2021 before fears spread around the new Omicron variant of Covid-19. In its latest minutes, the MPC said that "an increase in Bank Rate of 0.15 percentage points is warranted at this meeting". A rate rise was unexpected this month and the MPC noted the "two-sided risks around the inflation outlook in the medium term", but agreed that some modest tightening of monetary policy is "necessary to meet the 2% inflation target sustainably".

Discussing Omicron, the MPC said that "global risky asset prices fell in response to this news but have since largely recovered". Although the Omicron variant is likely to weigh on near-term activity, the MPC said its impact on medium-term inflationary pressures is "unclear at this stage".

The Committee continued: "The Omicron variant poses downside risks to activity in early 2022, although the balance of its effects on demand and supply, and hence on medium-term global inflationary pressures, is unclear. Global cost pressures have remained strong."

Bank staff have revised down their expectations for the level of UK GDP in Q4 by around 0.5% since the November Report, leaving GDP around 1.5% below its pre-Covid level, largely due to voluntary social distancing. The experience since March 2020 suggests that successive waves of Covid appear to have had less impact on GDP, although there is uncertainty around the extent to which that will prove to be the case on this occasion.

The MPC added: "The MPC’s remit is clear that the inflation target applies at all times, reflecting the primacy of price stability in the UK monetary policy framework. The framework also recognises that there will be occasions when inflation will depart from the target as a result of shocks and disturbances. In the recent unprecedented circumstances, the economy has been subject to very large and repeated shocks. Given the lag between changes in monetary policy and their effects on inflation, the Committee, in judging the appropriate policy stance, will as always focus on the medium-term prospects for inflation, including medium-term inflation expectations, rather than factors that are likely to be transient."

At its November meeting, the Committee judged that, provided the incoming data, particularly on the labour market, were broadly in line with the central projections in the November Monetary Policy Report, it would be necessary over coming months to increase Bank Rate in order to return CPI inflation sustainably to the 2% target.

The MPC will review developments, including emerging evidence on the implications for the economy of the Omicron variant, ahead of the February 2022 Monetary Policy Report.

Posted by MMB Finance Swindon on 16 December 2021