A hawkish rate setter at the Bank of England has said the Omicron coronavirus variant added uncertainty to the economic outlook, meaning there were “advantages” in waiting for more information before tightening monetary policy.
The cautious approach by Michael Saunders, an external member of the Monetary Policy Committee, reinforced some economists’ expectations that the UK central bank would hold its policy rate at 0.1 per cent at the upcoming December meeting.
Referring to the timing of an interest rate rise, Saunders said in a speech on Friday: “At present, given the new Omicron Covid variant has only been detected quite recently, there could be particular advantages in waiting to see more evidence on its possible effects on public health outcomes and hence on the economy.”
Saunders was one of the two members of the nine-strong committee who voted for an interest rate rise to 0.25 per cent at the last meeting. Policymakers in many advanced economies, such as the US and the eurozone, are closely watched by investors for signs of a rate increase to respond to inflation that has surged to well above their targets.
Saunders said that at the meeting on December 16, a “key consideration” for him “will be the possible economic effects of the new Omicron Covid variant, and the potential costs and benefits of waiting to see more data on this before — if necessary — adjusting policy”.
His speech showed that “his underlying view remains hawkish, but Omicron has added a layer of uncertainty,” said Andrew Goodwin, economist at consultancy Oxford Economics.
Goodwin added that the December meeting was “on a knife-edge”, as the strength of the incoming data clashed with news of the new variant. “Unless we get some clarity on Omicron in the next two weeks, we think the majority will be keen to press pause for the time being,” said Goodwin.
Similarly, traders now view a rate rise this month as a roughly one-in-three chance, compared with just below 50 per cent prior to Saunders’ comments. Before the emergence of the Omicron variant there was a roughly 75 per cent probability of a December increase priced in.
However, Saunders also warned that a continued delay in tightening monetary policy “also could be costly”. He explained that if the economy continued along its recent path, maintaining the current highly accommodative policy would probably result in the labour market tightening further and reinforced risks of a further rise in long-term inflation expectations.
“This could require a more abrupt and painful policy tightening later,” he explained.
Saunders was more hawkish on inflation. The bank expects inflation to peak at 5 per cent in the spring and slow afterwards, with two-sided risks to the outlook. However, Saunders said: “The balance of these risks is more to the upside than downside.”
A “major upside risk” compared with the bank forecast comes from the possibility of a bigger rundown of the excess savings accumulated by households during the pandemic, which has now reached £250bn, or 17 per cent of annual consumer spending.
He also said that in his view there was a series of risks that pointed to a “more persistent overshoot of the 2 per cent inflation target”, including stronger underlying pay growth.
The bank has forecast a slowdown in pay growth in 2022, but with fewer EU workers, lower labour force participation and strong hiring, “it seems more likely to me that pay deals will pick up in the coming year”, he said.
Additional reporting by Tommy Stubbington
Source: Economy - ft.com