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Traders slash odds on December interest rate rise

·3-min read
Bank of England
Bank of England

Markets abandoned their bets on an interest rate rise this month after one of the Bank of England’s most hawkish officials said there was a case to “wait and see” on the impact of omicron.

Michael Saunders, an external member of the Monetary Policy Committee, said the new variant could offer reason for pause.

He told a Bank webinar there “could be particular advantages in waiting to see more evidence on its possible effects on public health outcomes and hence on the economy”.

However, Mr Saunders, who voted for a rise at the MPC’s November meeting, said “continued delay also could be costly”. The committee decided to hold rates in a 7–2 vote that surprised markets.

He warned that keeping the cost of borrowing at ultra-low levels could risk exacerbating inflation and may “require a more abrupt and painful policy tightening later” to meet Threadneedle Street’s 2pc target.

The former Citi economist said any increase in the Bank Rate was likely to be limited: “Provided we do not delay too long, it should be a case of easing off the accelerator rather than applying the brakes.”

Traders cut their bets that the MPC will increase rates to 0.25pc at its December 16 meeting in the wake of Mr Saunders’ comments.

Currency market position implies a 40pc chance of an increase, having been as high as 60pc, while the pound fell 0.2pc.

Mr Saunders said it would not be sensible to give “precise forecasts” on the future path of rates, but added: “If the economy develops in line with the [BoE] central forecast or my expectations, the direction of travel for Bank Rate during the next few quarters is clearly likely to be upwards.”

Omicron could still “significantly affect the economic outlook” even if the Government did not introduce any new restrictions, he said.

Michael Saunders
Michael Saunders

Consumer price inflation hit a 10-year high of 4.2pc in October amid severe supply chain disruptions and high energy costs. It is expected to increase further in the coming months, with the Bank forecasting it will peak at about 5pc in April.

Mr Saunders’ comments came as survey data showed input price inflation for manufacturers hit a fresh record high in November.

IHS Markit said companies faced another month of “rapid” cost increases, including higher wages and prices paid for energy and raw materials.

New orders increased at the fastest pace since June amid rising spending, according to purchasing managers, with companies hiring rapidly in response to demand and increasing backlogs.

Chris Williamson, IHS Markit’s chief business economist, said: "A combination of sustained buoyant business growth, further job market gains and record inflationary pressures gives a green light for interest rates to rise in December."

The picture for global monetary policy was further clouded by weak US jobs numbers, which showed companies added fewer than half the number of employees expected.

Non-farm payrolls increased by 210,000 in November, according to the Bureau for Labor Statistics, well below an expected rise of 550,000.

However, US unemployment fell from 4.6pc to 4.2pc as readings for previous months were revised higher. November’s reading may be similarly adjusted.

The report comes after the Federal Reserve chairman, Jerome Powell, said the “very strong” US economy meant the central bank may move quicker than previous indicated to tighten policy.

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