Borrowing costs

Bank of England becomes first major central bank to increase borrowing costs since pandemic

The Bank of England on Thursday became the world’s first major central bank to raise borrowing costs, despite the rise in Omicron cases across the UK.

The BoE said Britain and the global economy were in a “substantially different” situation than at the start of the pandemic [source: Getty]

The Bank of England on Thursday became the world’s first major central bank to raise borrowing costs since the coronavirus pandemic hit the global economy, as it said inflation is expected to hit 6% in April – three times its target level.

Most economists surveyed by Reuters expected the BoE’s Monetary Policy Committee to keep the discount rate at 0.1% due to the Omicron variant of the coronavirus which caused a record number of Covid-19 cases in Britain on Wednesday .

But the MPC has seen early signs that underlying inflationary pressure may become sustainable after its recent spike.

“The labor market is tight and has continued to tighten, and there are signs of further pressure on domestic prices and costs,” the BoE said.

“While the Omicron variant is likely to weigh on activity in the short term, its impact on inflationary pressures in the medium term is unclear at this point.”

The British pound jumped three-quarters of a cent against the US dollar to its highest level since November 30, and yields on interest-sensitive two-year gilts rose more than 7 basis points on the day to reach 0.56%, their highest level since December 1.

“The MPC’s decision to increase the discount rate today, before it knows the full extent of the economic damage caused by the booming Omicron variant, underscores how concerned it is about the prospects of ‘inflation and the risk of inflation expectations going down if it does. nothing, “said Samuel Tombs, analyst at Pantheon Macroeconomics.

The nine MPC members voted 8-1 to increase the discount rate to 0.25% from 0.1%, with external member Silvana Tenreyro the only dissenting voice.

The MPC also highlighted the likelihood of further rate hikes to come.

“The Committee continues to believe that there are two-way risks surrounding the medium-term inflation outlook, but that a slight tightening of monetary policy over the forecast period is likely to be necessary to achieve sustainable inflation. 2% inflation target, ”he added. noted.

The BoE has downgraded its growth forecast for December and the first quarter of 2022 due to the spread of Omicron which could lead to “a very high number of infections in a very short period”.

But he also said Britain and the global economy were in a “substantially different” situation than at the start of the pandemic, with inflation now high.

He focused more on the “upside risks” to wage trends and said there were few signs of an increase in unemployment after the end of the government’s employment support leave program. September 30.

The UK central bank caught many investors off guard six weeks ago when it kept the policy rate on hold, giving itself more time to see the extent of any impact on the labor market from the end of the program.

At its December meeting, the MPC voted 9-0 to keep the central bank government’s bond purchase program at its target size of 875 billion pounds ($ 1.16 trillion). The BoE also bought 20 billion pounds of corporate bonds.

Thursday’s rate hike put the BoE ahead of the US Federal Reserve. On Wednesday, the Fed said it was accelerating the phase-out of its bond buying stimulus, initially ahead of perhaps three interest rate hikes in 2022.

The European Central Bank and the Bank of Japan are still a long way from increasing borrowing costs.