Jonathan Cable

LONDON (Reuters), – As red-hot inflation continues to rise, the Bank of England plans to continue its tightening cycle. The economic threat from Omicron coronavirus mutation will be less than previously thought. A Reuters poll revealed that the Bank of England intends to push ahead with next month’s tightening cycle.

The British central bank was last month’s first rate-setter major to raise interest rates after the outbreak of the coronavirus pandemic. This surprised markets, economists and others who expected delays.

Even though Omicron was sweeping Britain at that time, Britain’s central bank declared it had to respond because there were warning signs of rising inflation.

According to Wednesday’s report, inflation reached its highest point next quarter. Then, it will begin to fall in the third. And, finally, it won’t hit the BoE target of 2% by the end of the year.

The median inflation predictions for the next quarter and the previous quarter jumped to 5.2% & 5.5%, respectively, in Friday’s poll. They were 4.7% & 4.6%, respectively, in the December one.

James Smith from ING stated, “Inflation surprised higher once again”

(Graphic, Reuters Poll: UK inflation and interest rate outlook: https://fingfx.thomsonreuters.com/gfx/polling/lgvdwjzalpo/UK%20inflation%20and%20interest%20rate.PNG)

The market is pricing in a 85% chance that the BoE will raise its main interest rate by 0.50% next month.

British consumers are facing additional problems due to an expected 50% rise in energy costs and an increase of social security payments in April.

Nearly 65% of the respondents to the Jan. 17-20 poll anticipated a 25 basis-point rate rise from 0.25% at the BoE’s Monetary Policy Committee meeting on February 3. While the percentage expecting a rise of 0.50% was greater than 75% by March’s end,

Median projections indicated that the BoE will increase its main rate 25 basis points more in the third-quarter – which was one quarter earlier than last month. But it will still wait until next year before increasing it to 1.00%.

Asking how high this rate would be in the current cycle, the median reply was 1.50%. It is still historically low.

Also priming for action, the Federal Reserve https://www.reuters.com/business/fed-raise-rates-three-times-this-year-tame-unruly-inflation-2022-01-20 will raise interest rates three times this year, another Reuters poll found.

OMICRON

Britain’s economy surpassed its pre-pandemic size https://www.reuters.com/world/uk/uk-economy-finally-bigger-than-before-pandemic-november-2022-01-14 in November, official data showed last week, although some of that momentum was probably lost as people stayed home ahead of the holiday season to ensure they were healthy for Christmas celebrations.

Shopper numbers https://www.reuters.com/business/retail-consumer/uk-shopper-footfall-central-london-drops-30-versus-last-week-2021-12-24 in central London on Christmas Eve were 30.3% lower than on the previous Friday, according to data from Springboard.

According to the poll, economic growth is expected to slow to 0.6% in this quarter. It had risen by 1.0% to the end 2021. After that, it will increase 0.9% by the end of next quarter and slow to 0.7% in the second quarter.

For 2022, GDP growth was estimated at 4.5% according to the median estimates of 66 economists. In 2023, it was 2.2%. It follows last year’s 7.0% growth.

Boris Johnson is facing growing pressure to resign due to a string of scandals. He took a gentle approach when dealing with Omicron and he did not impose the same strict measures as in previous waves. On Wednesday, he declared the lifting of all COVID-19 limits.

The Omicron version would have more economic impact than the Delta variant. However, the majority of respondents (24) to an additional question) said that the Omicron variant would have less or more impact on the economy.

(Graphic, Reuters Poll: UK economic outlook: https://fingfx.thomsonreuters.com/gfx/polling/akpezewxbvr/Omicron.png)

George Buckley from Nomura stated, “As we enter the spring, I imagine that confidence will be supported because COVID-19 patients will be somewhat lower than we have an economy of people willing to go out and buy money.”

This suggests there will be an increase in consumer spending especially services as more people start to buy experiences and less stuff.

(For additional stories about the Reuters global economy poll, click here