The Bank of England announced on Thursday a slight rate rise to 0.25 per cent signalling a clear change of track amid Omicron uncertainty.
The BoE has opted to shift from a risk management approach over concerns about a tight labour market and rising inflation.
“At this meeting, most members of the committee judged that an immediate, small increase in bank rate was warranted. Although the conditions for tightening set out in November had been met, the decision at this meeting was finely balanced because of the uncertainty around COVID developments,” the BoE said.
It noted that maintaining the current monetary policy stance when CPI inflation was materially above the 2 per cent target and the output gap appeared to be closed “might cause medium-term inflation expectations to drift up further”.
According to Oxford Economics, the UK’s monetary policy committee framed the vote as making good on its earlier vow to tighten policy if the post-furlough scheme labour market data remained robust.
However, commenting on the bank’s surprise move, chief UK economist Andrew Goodwin said, “Omicron will dictate whether or not this was the right move”.
According to Oxford’s modelling, monetary policy has become a much less effective policy tool since the global financial crisis because bank lending has become less sensitive to interest rates, as such it expects the damage to activity from a 15bp rate hike to be mild.
“If Omicron proves to be much more damaging to activity, the MPC could be forced to reverse course quickly and today’s decision may ultimately be viewed in the same light as the ECB’s ‘policy mistakes’ of 2008 and 2011,” Mr Goodwin said.
Maja Garaca Djurdjevic
Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.
