Wage growth is slowing fast; a new variant is ripping through your capital city, shuttering restaurants and other venues in its wake; and inflation is rising due to supply chain and energy pressures.
So what do you do if you’re a central bank? Raise rates of course!
Just in from the Bank of England’s Monetary Policy Committee:
At its meeting ending on 15 December 2021, the MPC voted by a majority of 8-1 to increase Bank Rate by 0.15 percentage points, to 0.25%. The Committee voted unanimously for the Bank of England to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £20 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £875 billion, and so the total target stock of asset purchases at £895 billion.
The hike comes after several members of the MPC seemed to suggest that they would stand pat due to Omicron, including Michael Saunders, who is viewed as one of the committee’s hawks. Since Saunders made those remarks earlier in the month we’ve seen Covid cases surge to hit a record high on Wednesday, with the Omicron variant not even the dominant strain (yet) in most parts of the UK.
You might recall MP Pat McFadden labelling the Bank an “unreliable boyfriend” for wishy-washiness in the past. Well, here we go again.
We’re also not convinced there’s an economic argument either. The Bank’s justification is built around an idea that raising rates will keep inflation expectations anchored around its 2 per cent target — something of a jump down from the latest print of 5.1 per cent. How a 15-basis-point hike will do that in the face of a Covid-induced supply side shock that will put further pressure on the cost of consumer goods, we’re not sure. What we’re more certain of is that the latest surge in cases is likely to hit demand for services, and rate hike won’t help that one iota.
Source: Economy - ft.com
