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United Kingdom Monetary Policy December 2021

United Kingdom: BoE hikes rates in December

At its meeting ending on 15 December, the Bank of England (BoE) increased the bank rate from 0.10% to 0.25%. This surprised market analysts, who had expected the rate to remain unchanged. However, the BoE agreed to keep the total target stock of investment-grade corporate bonds and UK government bonds purchases at GBP 895 billion.

The Bank’s decision was driven by the desire to rein in surging inflation, which rose to an over-decade high in November. Moreover, the Bank sees inflation increasing even further early next year, peaking at around 6.0% in April. In addition, the labor market is performing well despite the end of the furlough scheme, with unemployment falling and underlying earnings growth above pre-pandemic levels according to the Bank. As such, officials felt the economy was strong enough to absorb a rate increase, despite the likely dampening impact that the Omicron variant will have on activity in the near term.

The Bank’s forward guidance was hawkish, with the communiqué stating that “some modest tightening of monetary policy over the forecast period is likely to be necessary to meet the 2.0% inflation target sustainably”. As such, our panelists see the bank rate rising further next year.

Kallum Pickering, senior economist at Berenberg, gave his outlook for rates:

“We expect a further 25bp hike in February 2022 to take the bank rate to 0.50%. Such a move would open the door for the BoE to begin its passive balance sheet unwind at the May MPC meeting. Our medium-term calls for the Bank rate to remain unchanged. By end-2022, we expect the Bank rate to have risen to 0.75%.”

Daniel Vernazza, chief international economist at UniCredit, was more dovish:

“The UK economy was already slowing materially before the Omicron variant was identified […] and the sharp rise in Covid-19 cases along with a significant squeeze in real disposable income (from high inflation and reduced fiscal support), low consumer confidence and slightly tighter monetary policy will likely all make for a difficult few months ahead. We think these headwinds will likely force the MPC to pause raising rates for some time now, although it will probably be able to do one more hike before the end of next year.”

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