Omicron and new restrictions raise prospect of Bank holding rates once more

The Bank of England may hold off from raising interest rates once more on Thursday due to Omicron fears and new restrictions to control the spread of the virus, according to experts.

Having taken financial markets by surprise when it kept rates unchanged in November, the Bank had been widely expected to press the button on a rise from 0.1% to 0.25% this month to rein in soaring inflation.

But many economists and investors believe the recent emergence of the new variant and the Government’s move to impose Plan B restrictions in response has increased the likelihood that the Bank will once more wait and see before taking action.

Economic growth could be impacted, albeit not on the scale seen in full-scale lockdowns, while there are fears that more restrictions may be necessary if the variant proves more dangerous.

It is set to be a close call among policymakers on the Monetary Policy Committee (MPC), however, with some economists believing a hike could still be on the cards given rampant inflation.

Martin Beck, chief economic adviser to the EY Item Club, said: “The new Omicron Covid-19 variant has complicated the MPC’s December decision.

“New restrictions globally threaten to hold up supply chains even more, while consumers and businesses could reasonably be expected to become more cautious to spend.

“If Omicron’s economic impact were to prove more significant than expected, an interest rate rise in December’s meeting might have to be quickly reversed.

“Given this, the case for the MPC to not raise Bank Rate this year and wait and see how the economic landscape looks when it next meets in February 2022 is a strong one.”

Allan Monks at JP Morgan said he believes the latest restrictions could knock monthly economic output by around 0.5% in December and January.

This comes on top of supply chain troubles, which are already hampering the UK economic recovery.

He said: “The impact on confidence will be important – with people cancelling some spending plans for the future and voluntarily becoming more cautious in their behaviour.”

But the Bank faces a difficult balancing act as pressure builds on it to help bring inflation back to its 2% target.

Official figures on Wednesday are expected to show another rise in inflation – to 4.8% from 4.2%, according to Pantheon Macroeconomics.

Bank governor Andrew Bailey said last month he wanted to see more evidence that the end of the furlough support scheme had not pushed up unemployment significantly before hiking rates.

Further jobs data due on Tuesday is expected to confirm a hot labour market and rising wages, which may prompt some policymakers to set aside Omicron worries and vote to increase rates.

Experts at BNP Paribas believe the majority on the MPC will still vote for a rate rise, although they admit the vote will be “finely balanced”.

They said: “The spread of the Omicron variant has added an element of additional uncertainty to the near-term outlook which makes such a move less compelling.

“However, we think the majority of the Committee will be persuaded by the economic data, which clearly justify the start of the tightening process.”

Mr Monks said while he believes the Bank will hold fire in the current uncertainty, it will only be a brief pause until its next meeting.

“We would expect any dampening impact from the latest restrictions on currently strong labour market momentum to be brief and modest, leaving the MPC able to follow through with a February rate rise.”