BoE is still likely to hike interest rates by 15 basis points to 0.25% at its December meeting despite the rise in uncertainty around the Omicron variant, Deutsche Bank senior economist Sanjay Raja said on Thursday.
Raja said Deutsche was sticking to its call because fundamentally, news of the Omicron variant has changed little on the medium-term economic outlook.
“The labour market remains as tight as it has been in recent memory, in spite of the furlough scheme ending on 30 September,” he said. “And inflation continues to outpace staff forecasts, despite a sizeable upward revision in the November Monetary Policy Report.”
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Moreover, Raja said the potential disruption from Omicron may lead to even more inflationary pressures in the medium term, with supply chain bottlenecks and labour shortages/mismatches further exacerbated by rising restrictions, both domestically and globally.
“In the end, a 15bps hike would do little to disrupt the recovery, given the lengthy lag in monetary policy transmission,” he said.
Risks to Deutsche bank’s view are finely balanced, however. “As Saunders recently noted, there may be some marginal benefit in waiting for new information on the Omicron variant, including its impact on infections, hospitalisations and vaccine efficacy.
“But, we argue that there is also a cost to waiting – likely requiring a faster pace of tightening in the near term to keep medium-term inflation in check, something we think the Bank will likely want to avoid.”
By Michele Maatouk
Source: ShareCast
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