The Bank of England has a difficult decision to make on Thursday. At 4.2%, the inflation rate is now more than double its 2% target. But with the long-term economic effect of the Omicron variant still unknown, it may choose delay tackling inflation instead of risking an economic pullback. Of course, if it chooses to raise rates, pound sterling (GBP) could soar.

Interest rate hike: unemployment falling

Today’s figures from the Office for National Statistics (ONS) show that the overall unemployment rate fell to 4.2% between August and September. Moreover, employers added 257,000 staff onto payrolls in November, taking the total above pre-pandemic levels. And there are a record 1.22 million job vacancies, 434,500 more than at the start of the pandemic.

However, the unemployment rate rose from 4% to 4.3% between October and November. It’s also worth noting that some workers who are being made redundant at the end of the furlough scheme aren’t included in the ONS figures, as they are still working out notice periods. Therefore, it will be some time before the full impact of the scheme’s closure is felt.

But ONS Director of Economics Statistics Development, Darren Morgan, said there was ‘no sign of the end of the furlough scheme hitting the number of jobs. At the last MPC meeting, the Bank said that ‘near-term uncertainties remain, especially around the outlook for the labour market.’ With the labour recovery seemingly strong, now could be the time to tackle the UK’s sky-high inflation.

In November’s Monetary Policy Report, the Bank said that ‘it will be necessary over coming months to increase the Bank Rate in order to return CPI inflation sustainably to the 2% target.’ And the Bank has been clear that this ‘inflation target applies at all times.’

The Omicron uncertainty

However, these latest unemployment figures come from before the discovery of the Omicron variant. Last month, Bank of England Chief Economist Huw Pill said that ‘the ground has been prepared for policy action,’ before later describing the new variant as a 'punch in the face.'

Already, non-essential employees have once again been asked to work from home. Masks are now mandated in most public spaces. Today, MPs are voting on a controversial measure to enforce Covid passports to access nightclubs or high-capacity venues.

Scientists agree that a third ‘booster’ jab is essential to stop the spread of symptomatic Omicron-caused coronavirus. But the booster campaign is already running into logistical problems. And with cases surging, there are currently no PCR tests available at walk-in centres.

Yesterday, PM Boris Johnson said that ‘we take whatever steps are necessary to protect public health.’ He repeatedly refused to rule out further restrictions before Christmas. Meanwhile, modelling from the London School of Hygiene and Tropical Medicine shows that in the most pessimistic scenario, hospitalisations might even reach double the peak of the January 2021 wave.

And schools in some areas are struggling to stay open. General Secretary of the Association of School and College Leaders Geoff Barton said that there are ‘some pockets of very severe low attendance.’ And speaking to LBC, Health Secretary Sajid Javid said there are ‘no guarantees’ that school won’t close.

But a rate hike may not be immediate. Yesterday Governor Andrew Bailey said that ‘I don’t think (Omicron) is going to be a big stress event.’ He also announced plans to ease mortgage lending rules by scrapping the stress test that requires applicants to be able to afford a 3% rate rise, potentially helping 50,000 prospective first-time buyers onto the property ladder. However, it could see house prices soar even higher, and put financially weaker mortgage-holders at risk of negative equity. But it sends a strong signal to forex traders that the days of high interest rates are over.

KPMG Chief Economist Yael Selfin commented that ‘with the emergence of the Omicron variant...we now expect the MPC to unanimously hold off raising rates until next year.’ But with inflation soaring, the Bank is between a rock and a hard place. If it delays a rate rise now, the eventual increase could be sharper and more painful. And with the International Monetary Fund's Managing Director Kristalina Georgieva arguing that 'monetary policy needs to withdraw the exceptional support provided during 2020,' the pressure continues to build.

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Charles Archer | Financial Writer, London
Wednesday 15 December 2021