VIEW Bank of England ups rates as inflation worry trumps COVID

  • 12/16/2021
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LONDON, Dec 16 (Reuters) - The Bank of England raised its main interest rate to 0.25% on Thursday as inflation pressures mounted in Britain, surprising some market players who had expected another on-hold decision amid rising COVID infections read more . Rates rose to 0.25%, pushing sterling 0.8% higher , sending 10-year bond yields to the highest since December 3 and lifting UK bank shares almost 4% (.FTNMX301010) Below is the reaction from analysts to the latest move: GURPREET GILL, MACRO STRATEGIST, GOLDMAN SACHS ASSET MANAGEMENT "Only one MPC member voted for policy rates to remain unchanged, while other members appear to view Omicron as potentially reinforcing existing inflationary pressures. "Inflation is expected to peak at around 6% in April 2022, 1% above prior expectations. Notwithstanding virus uncertainty, we anticipate the Bank’s upcoming rate hiking cycle will be relatively short-lived. We think the base rate will rise to 0.75% next year, then remain on hold for a prolonged period." DEAN TURNER, ECONOMIST, UBS GLOBAL WEALTH MANAGEMENT "Following some dovish comments from MPC members recently, the Bank of England surprised the markets by hiking interest rates at today’s meeting. To be sure, the data, including Tuesday’s labour market report and yesterday’s inflation figures, has been supportive of tighter monetary policy. However, with the coronavirus situation evolving an equally strong case could have been made for sitting tight for now. "That being said, it was always a case of when, not if the BoE would hike. By moving today, the bank avoids the need to move more aggressively next year. We expect them to maintain rates for a few months, with the next move coming in May. A further rise should follow, taking interest rates back to their pre-pandemic levels by the end of next year. HUSSAIN MEHDI, MACRO AND INVESTMENT STRATEGIST, HSBC ASSET MANAGEMENT "The 8-1 vote to raise rates is fairly surprising given the emergence of the Omicron variant and uncertainty over the near-term growth impact. Nevertheless, there were solid reasons for immediate action. The labour market is tight, and Omicron has the potential to exacerbate supply-side constraints in goods and labour. Ongoing upside inflation risks are likely to push the MPC into further action in 2022." CHRIS SCICLUNA, HEAD OF ECONOMIC RESEARCH, DAIWA CAPITAL MARKETS "My initial thoughts are one of surprise given that they failed to raise rates in November and they clearly appear to have regretted that decision given that inflation has surprised to the upside and jobs numbers were good. "Still, the wage numbers suggest fears of second round effects form inflation are a bit overdone. "It"s especially surprising given the new wave of the pandemic. Clearly their communication is a bit to be desired and there are significant downside risks to activity from the latest wave of the pandemic." NEIL JONES, HEAD OF FINANCIAL INSTITUTIONS SALES, MIZUHO "The market had largely priced out a hike. This a surprise given the recent Omicron onslaught. Investors in large part had come around to the idea the bank would delay hikes into 2022. The pound should remain firm on this move." MATTEO COMINETTA, ECONOMIST, BARINGS INVESTMENT INSTITUTE "Caught in a perfect catch-22 situation, where it will be criticised for hurting an uncertain recovery if it hikes rates and for letting inflation run loose if it does not hike, the Bank of England chose the hardest path. "This was not what markets expected, making it the second time in two months that the BoE blindsides investors, with consequent volatility in bond and FX markets. The pound gained markedly after the decision. "It is certainly a sign of decisiveness that the MPC preferred to act now instead of playing it safe." SIMON HARVEY, SENIOR ANALYST, MONEX EUROPE "While the Bank"s decision today did go against our expectations, largely due to their sensitivity to the inflation backdrop, we think their reference to today’s rate hike as "finely balanced" suggests that a subsequent rate hike is unlikely in February. Rates remaining below 50bps prior to March has been our longstanding view given the large level of Gilt maturities due and the Bank"s commitment to cease reinvestments at the 0.5% level. This may limit further GBP upside against the dollar." STUART COLE, HEAD MACRO ECONOMIST AT EQUITI CAPITAL The 8-1 vote suggests that the Committee is more worried about inflationary pressures than possibly the market has been anticipating, particularly given that the growth forecast for Q4 has been revised downwards. "Although the BoE is saying the decision was finely balanced given Omicron, the 8-1 vote suggests otherwise. "Given that the market was largely expecting a no-change decision, questions may again be raised about the effectiveness of the BoE"s communications policy."

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