Omicron, a variant of Covid-19, has clouded market expectations for Bank of England’s 16 Dec interest rate decision. Market experts recommend that a highly anticipated increase be postponed to next year.
Analysts and traders were confident that the rate would rise by 15 basis points to 0.25 percent. This was in response to pressure from the bank to control rising inflation which reached a decade-high in October.
But, the Bank of England might not increase its interest rate until next year because of unknown economic impacts of Omicron.
No longer do the markets expect the Bank of England’s interest rate hike on 16 December.
Laith Khalaf of AJ Bell’s investment analysis said that Omicron had ‘punctured expectation of a Christmas rate increase’. Markets now expect the change to occur in February.
He said: “The Omicron variant’s emergence has crystalized fears that we are not out of the woods yet in terms of the pandemic, which led to a shift of monetary policy expectations.
“The oil price fell back and the yields on gilts dropped substantially, reflecting concerns that Omicron could spell trouble for global economic.
Joshua Mahony is a senior analyst in the market at IG. He agreed with Joshua that our expectations of a BoE rate rise for December have ‘largely disappeared, with very little chance we will see it. [Monetary Policy Committee]If this strain results in another round of lockdowns, tighten your policy.
Huw Pill, the BoE’s chief economist, acknowledged Friday that Covid-19’s latest strain and any government restrictions as a consequence ‘clearly will change our outlook on the world.’ He described Omicron’s emergence as “a punch in the face”.
Omicron has had a significant impact on our policy outlook. The BoE isn’t the only one affected. There are now markets that don’t price a rise in the US Federal Reserve, or for the European Central Bank, by 2022.
Richard Bernstein Advisors’ Deputy Chief Investment Officer Dan Suzuk said that the new version is more likely to cause supply chain disruptions which have already negatively impacted many economies in the past months.
He explained that although the market has started to expect easing supply disruptions to improve, a vaccine-resistant version would ensure these disruptions continue for much longer.
“This would leave central banks with the difficult choice of supporting growth and employment or fighting high inflation.
Group chief economist at AXA Investment Managers Gilles Moëc said that the ‘room for manoeuvre differs’ for the Fed and the ECB, with the former having benefited from the ‘flexibility’ it has demonstrated in recent months.
He explained: ‘[Fed chair]Jay Powell is sure to be happy with his refusal of being dragged into any discussion about the timing of the liftoff [of interest rates].
“The market had priced a move for next summer. But the Fed wouldn’t lose its face or credibility if they pushed towards 2023 pricing.
‘[But]For the ECB, things look more binary as they are expected to inform us at the next Governing council meeting on 16/12/12 if and how the Pandemic Emergency Purchase Programme will be terminated and if and what happens with the Asset Purchase Programme (APP).
‘An update on the forward guidance – on the link between the timing of the termination of [the Asset Purchase Programme and the first rate hike – is also due. It was always likely that decisions would be challenging in such a split council.
“The new variant creates uncertainty, adding another layer to the complexity.”