Aurelia Butler

LONDON (Reuters) – The Bank of England raised its main interest rate to 0.25% on Thursday as inflation pressures mounted in Britain.Most economists polled by Reuters had expected the BoE to keep Bank Rate at 0.1% due to a new surge in coronavirus cases. More

Officials led by Governor Andrew Bailey voted 8-1 to lift borrowing costs by 15 basis points to 0.25%, delivering an increase that no other Group of Seven central bank has made since the start of the crisis. Silvana Tenreyro was the sole dissenter. Policy makers said more “modest” tightening is likely to be needed as inflation heads toward a peak likely to be around 6% in April.The BOE’s precipitous shift into tightening mode will surprise the large majority of economists who anticipated no change, and investors who were pricing in around a 40% chance of a move. The outcome was the second in a row featuring a surprise after November’s decision to stay on hold wrong-footed financial markets. The U.S. Federal Reserve already set a hawkish tone on the eve of the BOE announcement by signaling three rate hikes next year and accelerating the wind down of its stimulus program, while Norway kept up its own tightening effort on Thursday with its second increase this year.  The BOE hike is a response to the danger posed by surging prices gains, with a report this week showing inflation jumped to 5.1% in November — more than double the central bank’s target — and a separate report Tuesday showing U.K. companies added to payrolls at a record pace.Considering that backdrop, Goldman Sachs Group Inc Chief European Economist Jari Stehn told Bloomberg Television just hours earlier that an outcome of no change was “not a done deal,” even though it was his main expectation.The decision to move now is all the more remarkable since the country is in the grips of a new coronavirus wave driven by the more infectious omicron variant, which has pushed daily case loads in the U.K. to the highest recorded total since the pandemic began. The danger that poses in potentially overwhelming the country’s health services is such that Prime Minister Boris Johnson’s government has reintroduced some curbs on activity, with more possible in coming days and weeks if the outbreak can’t be quelled.  By moving now, the BOE heeded a warning this week from the International Monetary Fund, which cautioned against policy inaction on inflation.  The Fed’s shift on Wednesday underscores the level of alarm felt by some global central bankers. It laid out a road map for a series of rate increases over coming years as Chair Jerome Powell signaled that inflation is now enemy No. 1 to keeping the U.S. economic expansion on track. Later on Thursday, the European Central Bank is due to explain its own plan for moving on from emergency stimulus. President Christine Lagarde has been at pains however to persuade investors that a rate increase in the euro zone isn’t going to happen any time soon. ©2021 Bloomberg L.P. More

(Reuters) – The ink had barely dried on the Federal Reserve’s November policy decision to begin reducing bond purchases when Chair Jerome Powell became persuaded they’d need to push even harder against inflation. It was the culmination of a volatile few weeks in which inflation went from an academic threat – Powell offered a lengthy discourse on it at the Fed’s Jackson Hole symposium – to a clear danger to the economy and sent the Fed chair charting out the central bank’s next move.Leading up to the November meeting, a few policymakers – St. Louis Fed President James Bullard among them – had been pressing for a faster “taper” to make room for an earlier rate hike if needed. But their voices hadn’t carried the day, and Fed policymakers had for weeks been prepping markets and the public to expect the exercise of bringing its bond purchases from $120 billion a month to zero would extend into mid-2022. (Graphic: Wage and benefit costs Wage and benefit costs, https://graphics.reuters.com/USA-FED/INFLATION/zdvxorebnpx/chart.png) Just days before the Fed’s November meeting, however, when the plan was to be announced, Powell got his first inkling that the pace might be too slow: The Labor Department reported labor costs in the third quarter had shot up by the most since 2004.”I thought for a second there whether we should increase our taper,” Powell said at a press conference on Wednesday, but decided to go ahead with the pace that had been “socialized.” The Fed announced at the end of the meeting on Nov. 3 that it would begin reducing its purchases of Treasury securities by $10 billion monthly and of mortgage-backed securities by $5 billion starting in mid-November, a tapering rate that if sustained would have wrapped up the program by June. (Graphic: Labor market progress, https://graphics.reuters.com/USA-FED/POWELL-PIVOT/byvrjqdjdve/chart.png) Another jolt came just two days after the meeting when employment gains for October came in much higher than expected, and the Labor Department said nearly a quarter million more jobs had been created in the prior two months than initially thought.It was the next week’s inflation data, though, that carried Powell fully over the line: The Consumer Price Index showed inflation surging at a rate not seen in three decades and growing increasingly broadbased, data that made it untenable to continue characterizing it as “transitory.””I honestly at that point really decided that I thought we needed to look at speeding up the taper and we went to work on that,” he said. (Graphic: The COVID inflation surge The COVID inflation surge, https://graphics.reuters.com/USA-FED/INFLATION/akvezawxopr/chart.png) From there, Powell moved to build consensus among policymakers that they should double the taper pace to conclude asset purchases by March – a decision approved unanimously at this week’s meeting. That gives officials more leeway to raise interest rates next year if needed to tackle the higher inflation, a step they would not want to take until after they’ve stopped purchasing bonds. “It was essentially higher inflation and, and faster – turns out much faster – progress in the labor market,” Powell said. Taming higher inflation will also help to remove one of the biggest “threats” to the Fed’s goal of achieving maximum employment because it could allow for a potentially longer expansion, Powell said. “That’s what it would really take to get back to the kind of labor market that we’d like to see,” Powell said. “And to have that happen, we need to make sure that we maintain price stability.” More