IMF warns Bank of England against inflation not to act before key vote

An aisle near the Bank of England (BOE) in the City of London, United Kingdom, on Thursday, March 18, 2021.

Hollie Adams | Bloomberg | beautiful pictures

LONDON – The International Monetary Fund has urged Bank of England to avoid “inaction bias” as it prepares for a key vote on Thursday on when to raise interest rates in the face of high inflation.

The The bank’s monetary policy committee surprised the market in November by voting 7-2 to keep its benchmark interest rate at a historic low of 0.1%. Governor Andrew Bailey acknowledged that “There are warning signs” about inflation, but policymakers will need to see more data from the labor market to gauge the impact of the country’s growth plans before tightening policy.

New data on Tuesday indicated that the labor market remained strong in November, with 257,000 employees added to payrolls, but the threat of an omicron variation late last month left the central bank in trouble. right another curve.

In its closing statement on Tuesday following a recent staff visit to the UK, the IMF said the MPC “has the tools to tackle volatility including full control over the inflation path back to target levels”. spend” is 2%.

“However, it will not be a simple matter to see sustained changes in wages and relative prices while keeping expectations unchanged,” the IMF report said.

“It’s important to avoid inaction bias, given the costs involved in containing second-round effects.”

Since the emergence of the omicron variant, some economists now predict the MPC will wait until February before triggering its rate hike cycle. However, the market rallied 15 basis points at the November meeting, meaning any further delays could add to volatility.

The UK consumer price index up 4.2% in the 12 months to October, the strongest increase in a decade and up from 3.1% in September. The Bank of England expects inflation to peak at 5% in spring 2022 before turning around. back on target by the end of 2023, when the impact of oil and gas prices fades and commodity demand softens.

Market on tents

Hugh Gimber, global market strategist at JP Morgan Asset Management, said Tuesday’s labor market report is likely enough to convince the MPC to raise rates on Thursday, if no omicron variation is present.

The UK’s Health Security Agency has estimated that new omicrons are running at 200,000 a day, well ahead of the country’s official figures.

“The unemployment rate is falling, while record demand for workers continues to pressure wage increases. Adding to the inflation data is expected to hit a 10-year high tomorrow, and obviously the 0.1% interest rate is no longer relevant to the UK economy,” said Gimber.

“Sadly, Covid-19 is a bit of a puzzle. With Omicron posing short-term risks to the growth outlook and there’s still much to learn about the vaccine’s actual effectiveness, we’re sure we’ll have a better understanding of how effective the vaccine is,” he said. I would expect policymakers to instead choose to keep prices unchanged in the hope that the outlook will become clearer in February.”

However, there are still differences among strategists. Despite the additional uncertainty fueled by the omicron variation, BNP Paribas Chief European economist Paul Hollingsworth continues to expect the MPC to increase by 15 basis points on Thursday.

“We think much of the Committee will be convinced by the economic data, which clearly warrants the start of the tightening process, in our view,” he said in a note this week. before.

“Regardless of whether the MPC goes into next week or not, the bigger picture for us is that markets are still overvalued at a bullish rate next year.” IMF warns Bank of England against inflation not to act before key vote


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