Time to wrap up, after a day of central bank drama, and rising concerns about Omicron’s impact on the UK and European economies.

Here’s today’s main stories:

Goodnight. GW

The Bank of England has unexpectedly raised interest rates for the first time in three years amid growing concerns over inflation, despite the rapid spread of the coronavirus Omicron variant.

Threadneedle Street’s monetary policy committee (MPC) voted by a majority of eight to one to raise rates from the historic low of 0.1% to 0.25%, judging that pressure on households from surging living costs outweighed the risks to the economy from the new variant.

With inflation at the highest rate for a decade, the Bank warned there was unlikely to be any reprieve over the winter months from soaring energy costs driving up the rate from 5.1% at present to 6% next spring – three times its official target.

However, the surprise decision comes amid a severe deterioration in the economic outlook with Omicron triggering a collapse in consumer confidence, leading to a wave of cancellations for hospitality businesses during the key festive trading period.

Samuel Tombs, the chief UK economist at the consultancy Pantheon Macroeconomics, said:

“The MPC’s decision to hike bank rates today, before it knows the full extent of the economic damage wrought by the surging Omicron variant, underlines how worried it is about the outlook for inflation.”

The pound rose sharply on the global currency market on Thursday, up by almost a cent against the dollar,trading above $1.33 after the central bank became the first of its major peer global peers to raise rates.

In a sign of institutions scrambling to tackle inflationary pressures worldwide, the European Central Bank also said on Thursday it would scale back its multi-trillion euro quantitative easing pandemic support package. The US Federal Reserve said earlier this week it anticipated raising rates three times in 2022.

More here:

The world’s top central bankers have made some significant moves in the last day, setting the scene for more drama next year.

We seen the Federal Reserve speed up the tapering of its stimulus programme, and predict three rate rises in 2022.

The Bank of England has surprised markets with a pre-Christmas interest rate rise, with concerns about rising inflation outweighing Omicron uncertainty.

Paul Hollingsworth, chief European economist at BNP Paribas Markets 360, says:

• The BoE’s decision to hike rates affirms our view that on balance, the economic data would hold the upper hand.
• While the overall message was more hawkish than expected, we stick to our view that the next rate hike will not come until May, not least because of the MPC’s sensitivity to Omicron-related developments.
• Beyond that, we continue to expect the MPC to hike at a slower pace, but ultimately by more than is currently priced in to markets.

The European Central Bank is wrapping up its pandemic stimulus programme (PEPP) next March, but boosting another package to cushion the impact, and forecast that inflation will fall below its 2% target in 2023.

Craig Erlam of OANDA says this forecast means less action will likely be warranted from the ECB compared with others.

As expected, the central bank announced that the PEPP will draw to a close in March but will be offset by a temporary boost to the APP until the fourth quarter. Again, the Bank will be flexible with all tools and make adjustments as necessary.

This may seem obvious, but it is designed to avoid criticism and confusion at a time when forecasts are subject to such significant revisions.

Flexibility is key. As we’re seeing outside of central banks, look at OPEC+.

And Turkey’s central bank has cut interest rates again despite worries of a financial crisis and escalating inflation, sending the lira to new record lows.

Stocks have rallied hard in London today, as investors shrug off the Bank of England’s surprise interest rate rise.

Britain’s FTSE 100 index has closed 90 points higher at 7260 points, up 1.25%, shaking off recent Omicron losses.

Banks led the risers; their profit margins benefit from higher interest rates. Lloyds Banking Group jumped 4.6%, HSBC gained 3.7% and Barclays rose 3.2%.

The pound is still holding most of its gains, up over half a cent at $1.332

Erik Norland, senior economist at CME Group, says central bankers are starting to to diverge, which could lead to volatility:

“The BofE’s decision to raise rates reinforces how monetary policy is beginning to diverge globally. This divergence has the potential to create volatility in currency markets next year.

A number of central banks, mostly in emerging market economies, have already begun raising interest rates. By contrast, the People’s Bank of China is actively easing policy amid a slowdown in China’s real estate sector while central banks in the eurozone and in Japan show no signs of tightening economic policy.”

European markets also surged, with Germany’s DAX and France’s CAC gaining around 1%. Last night’s hawkish move from the US Federal Reserve, which is wrapping up its stimulus faster, has gone down pretty smoothly.

I’m afraid the Bank of England’s shock rate increase meant I didn’t cover much about the European Central Bank meeting today.

But you can catch up with this thread:

Holger Schmieding of Berenberg Bank has a nice summary:

Relative to the Fed’s dramatic pivot yesterday and the Bank of England’s rate hike today, the European Central Bank remains in the slow lane.

As expected, the ECB announced today that it will reduce its net asset purchases step-by-step next year. But the ECB left the question when it will end these purchases and start to raise rates wide open. While the ECB raised its staff projection for inflation in 2022 by a record amount, from 1.7% to 3.2%, it still projects a slowdown to 1.8% in 2023 and 2024.

For the two years that matter for its medium-term outlook, the ECB thus still expects inflation to fall short of its 2% target. Taken at face value, this suggests that the ECB does not (yet) see a need to raise rates within the next two years. Once again, the ECB emphasised that Eurozone inflation is mostly transitory, for instance by emphasising that energy prices accounted for more than half of November’s 4.9% inflation rate.

Bank of England governor Andrew Bailey says rising gas prices, driven by tensions between Russia and Ukraine, will push UK inflation to 6% in the next few months.

Speaking to Sky News, Bailey says that recent upward pressure on wholesale gas prices will drive up the cost of living, when the energy price cap is next lifted in April.

Bailey points out that gas prices are going up again, having dipped back from their highs this autumn, as geopolitical tensions rise.

I think this is directly related to some of the tensions we’re seeing on the border between Russia and Ukraine where a lot of Europe’s gas supply comes through.

That will feed through, I’m afraid, when the next price cap is set for all of us as domestic customers. That will feed through to the next price cap.

European gas prices headed towards record highs this week, after Germany said the controversial Nord Stream pipeline from Russia which bypasses Ukraine could not be approved, as Moscow builds up military forces on the Ukrainian border.

Explaining today’s interest rate rise, Bailey also explained that the labour market is very tight, with firms reporting difficulties recruiting staff. He also warns of signs of “more persistent price pressures”, which are worrying the Bank.

Here’s a video clip:

The MPC took today’s decision in full knowledge of the spread of Omicron, which it said had the potential to lead to “a very high number of infections over a very short period”, our economics editor Larry Elliott writes:

What’s more, it accepted the new variant of coronavirus would weigh on the economy in the short term.

But for now, the Bank seems to be assuming that the impact of Omicron will be to lead to still higher inflation, while having only a modest and temporary impact on output. That’s because tougher restrictions on socialising shift spending patterns away from face-to-face services and towards goods, where supply-chain bottlenecks have been responsible for a surge in prices.

The Bank does not have to hit the government’s 2% target at all times. It can tolerate a significant overshoot (or undershoot) if it believes precipitate action would cause damage to the economy.

On this occasion, it has decided the threat of inflation becoming embedded is greater than the risk to growth. That judgment will come under intense scrutiny in the coming weeks, and if things get really bad the Bank will come under pressure to bring rates down again.

In the meantime, the rate rise has made clear that the Bank sees its main task to be hitting the inflation target. With the Bank currently anticipating that borrowing costs will need to rise further next year, the onus is now on Rishi Sunak to support the economy through what look likely being a testing few months.

The emergence of Omicron had been expected to deter the Bank of England from lifting interest rates today, given the uncertainty over the variant.

The Monetary Policy Committee were briefed by Sir Chris Whitty, chief medical officer for England, about the risks to public health from the Omicron variant.

The minutes say:

The MPC had noted previously the risks to the economy from a drop in vaccine effectiveness arising from viral mutations, although it was unclear currently to what extent the Omicron variant would lead to a decline in vaccine protection against severe disease.

Given the clear signs of increased transmissibility for the new variant, there was the potential for a very high number of infections over a very short period.

But policymakers are also worried that pandemic disruption would lead to further supply chain disruption, and higher prices. The minutes explain:

There was some value in waiting for further information on the degree to which Omicron was likely to escape the protection of current vaccines and on the initial economic effects of this new wave.

There was, however, also a strong case for tightening monetary policy now, given the strength of current underlying inflationary pressures and in order to maintain price stability in the medium term. The economic impact of the new variant could, in some scenarios, increase these inflationary pressures further.

Raising interest rates won’t fix the global supply chain problems that have pushed up goods prices, or the record gas prices that have stoked energy bills.

And as monetary policy works with a lag, today’s surprise interest rate rise will take time to filter through to the inflation rate.

Ed Monk, associate director at Fidelity International, says households should expect prices to keep rising, and less cheap credit to help them.

“The Bank of England’s decision to raise rates ahead of Christmas and in the face of another potential blow to growth from Omicron indicates how seriously it takes the recent acceleration of inflation. Like most economists, the Bank has been caught off-guard by the speed of price rises.

“Even with the action taken today, households should expect their costs to continue to rise for some time. The small rise in rates will have a limited impact on demand and may take time to filter through to consumer behaviour, while many of the factors driving inflation remain outside of the Bank’s control. A rise in UK borrowing costs won’t ease up clogged supply chains or lower shipping costs.

“The signal today’s rate rise sends is that we should expect a period of belt-tightening and less cheap credit from here on out.”

The Bank of England has also cut its growth forecasts for December and the first quarter of 2022 because of the spread of Omicron (and still decided to raise interest rates....).

Bank staff now expect the economy to grow by 0.6% in the final quarter of this year, down from 1% forecast in last month’s November Report.

That would leave the economy around 1.5% below its pre-Covid level, and would be a slowdown on the 1.3% growth in July-September.

The minutes of the Bank’s meeting explain:

Growth in many sectors had continued to be restrained by disruption in supply chains and shortages of labour.

The impact of the Omicron variant, associated additional measures introduced by the UK Government and Devolved Administrations, and voluntary social distancing would push down on GDP in December and in 2022 Q1.

The experience since March 2020 suggested that successive waves of Covid appeared to have had less impact on GDP, although there was uncertainty around the extent to which that would prove to be the case on this occasion.

There had already been some tentative signs that UK economic activity had started to be affected by the emergence and spread of Omicron.

We’ve seen further evidence this morning: with private sector growth hitting a 10-month low (see here) and the number of seated diners falling again (see here).

The Bank of England has raised interest rates because prices are rising much faster than its target, and the labour market looks robust (although will Omicron change that?..).

The Bank now expects the CPI inflation rate to hit 6% next April, when the cap on energy bills is lifted. That’s triple its 2% target - and clearly the MPC feels it needs to act, after inflation hit a decade high of 5.1% yesterday.

In the minutes of today’s meeting, it says prices have kept climbing since its last meeting (when it surprised investors by NOT raising rates):

Twelve-month CPI inflation rose from 3.1% in September to 5.1% in November, triggering the exchange of open letters between the Governor and the Chancellor of the Exchequer that is being published alongside this monetary policy announcement.

Relative to the November Report projection, there has been significant upside news in core goods and, to a lesser extent, services price inflation. Bank staff expect inflation to remain around 5% through the majority of the winter period, and to peak at around 6% in April 2022, with that further increase accounted for predominantly by the lagged impact on utility bills of developments in wholesale gas prices.

And on unemployment, the BoE judges that the labour market has ridden out the end of the furlough scheme. On Tuesday, the jobless rate dropped again, to 4.2%, and firms have been reporting record vacancies.

At its November meeting, the Committee judged that, provided the incoming data, particularly on the labour market, were broadly in line with the central projections in the November Monetary Policy Report, it would be necessary over coming months to increase Bank Rate in order to return CPI inflation sustainably to the 2% target.

Recent economic developments suggest that these conditions have been met. The labour market is tight and has continued to tighten, and there are some signs of greater persistence in domestic cost and price pressures. Although the Omicron variant is likely to weigh on near-term activity, its impact on medium-term inflationary pressures is unclear at this stage.

The Committee judges that an increase in Bank Rate of 0.15 percentage points is warranted at this meeting.

Newsflash: The Bank of England has raised interest rates for the first time since the start of the coronavirus pandemic despite mounting concern over the Omicron variant.

Threadneedle Street’s monetary policy committee (MPC) voted to raise rates from the historic low of 0.1% to 0.25%, judging that pressure from surging inflation outweighed the risks to the economy from the new variant.

Official figures showed inflation hit 5.1% in November amid soaring energy prices and global supply chain bottlenecks, hitting a rate the Bank hadn’t expected to be reached until the spring. The MPC has an official inflation target of 2%.

More to follow....

Here’s a breakdown of the emergency measures which could help UK firms, particularly in hospitality and leisure, to ride out the new wave of Covid-19:

Reduce VAT for hospitality and tourism back to its emergency rate of 5%

In July 2020 the government cut the 20% VAT rate to 5% before increasing it in March this year to 12.5%. The current discount runs out in April, when it is due to return to 20%.

Reinstate 100% business rates relief for retail

The British Chambers of Commerce said this was needed to give businesses “the financial headroom to weather this challenging period”. Firms were able to claim 100% business rates relief until July when the discount was cut to 66%. Sunak said the programme will expire next April.

Make additional grant funding available

Funding to be administered locally by councils after they have judged which businesses face a cash crisis.

If ministers adopt plan C measures that come close to a fourth lockdown then “the government should remain open to increasing grant funding” to all businesses, the BCC said.

Reintroduce furlough (including flexible-furlough) for those sectors most exposed to the new measures

The furlough scheme closed altogether in September after the level of government support was reduced from 80% to 60% over the preceding three months. Business groups have asked for the 80% scheme to be reinstated.

Further support for businesses who have used government loan and tax deferral schemes.

Hundreds of thousands of businesses have taken out loans that must be repaid. Those that have yet to repay loans or applied for tax deferral schemes should be allowed to take longer repaying them.

HMRC, which has preferential creditor status in insolvencies, should also outline what steps it will take to play in supporting businesses at risk of failure.

The number of people dining out in the UK has fallen again, as the rush of Christmas party cancellations hit the sector.

The average number of UK seated diners in the seven days to Monday dropped to just 2% higher than in the same week in 2019, the lowest level since the reopening of indoor dining in England, Wales and Scotland back in May.

That’s down from 5% higher in the previous week, and the third weekly fall in a row, the Office for National Statistics’ weekly economic healthcheck shows.

It confirms that trading is deteriorating just when pubs and restaurants normally see a vital pick-up in business.

Transactions at Pret A Manger stores fell last week (apart from in Yorkshire). At London airports, Pret spending fell to the lowest level since late August, as the introduction of new travel restrictions hit passenger numbers.

Visits to shops fell too. Overall retail footfall in the UK fell by 1 percentage point in the week to 11 December 2021 and was 82% of the level seen in the equivalent week of 2019, the ONS says.

Growth across UK companies has tumbled this month, as the spread of the Omicron variant has hammered British hospitality and travel companies.

Private sector growth slowed to a 10-month low, data firm IHS Markit reports, due to tighter pandemic restrictions and renewed business uncertainty.

Business confidence fell, driven by a slump in morale among consumer-facing companies as some customers cancel bookings. New business growth in the services sector was the weakest since lockdown measures were eased in March.

Service sector firms, particularly in travel and hospitality, said consumer demand had been hit by tighter Covid-19 stringency measures and renewed travel restrictions [as pub and airline bosses have been warning].

This pulled Markit’s preliminary “flash” survey of purchasing managers down to 53.2 in December from 57.6 in November. That’s much weaker than expected, showing weaker growth so far this month.

Chris Williamson, chief business economist at IHS Markit, warns that the recovery is likely to keep weakening:

“The flash PMI data show the UK economy being hit once again by COVID-19, with growth slowing sharply at the end of the year led by a steep drop in spending on services by households.

Some brighter news came through from manufacturing, where an easing of supply chain delays helped lift production growth, but more importantly also helped take some upward pressure off prices to hint at a peaking of inflation. “With COVID-19 infections set to rise further in coming weeks due to the spread of the Omicron variant, and more restrictions being introduced, the pace of economic growth looks likely to continue to weaken as we head into 2022.

The bigger uncertainty will be on how rising infection rates both at home and abroad might cause further supply and labour shortages, and whether this means the easing of inflationary pressures seen in December proves frustratingly short-lived.”

Patrick Dardis, chief executive of pub chain Young’s, has warned that thousands of hospitality businesses will collapse in the new year, due to lost Christmas trading.

He told Radio 4’s Today Programme that people are ‘terribly confused’ by the ‘mixed messages last night’ from Chris Whitty and Boris Johnson over the omicron variant.

[Whitty urged Brits to limit festive socialising, which goes beyond the government’s previous advice, while Johnson said people should be cautious]

Dargis says the situation is having a significant impact on trading in the crucial December weeks. They are critical for thousands and thousands of businesses across the country that were ‘hanging on by their fingernails’ in the hope of a good Christmas.

And Dardis claims that a ‘fear campaign’ is damaging hospitality, saying:

Unfortunately, with the latest fear campaign that’s being run, it’s damaging so many businesses that could possibly have survived.

As a consequences, thousands and thousands of businesses will now collapse in January.

[Earlier this week, Wetherspoon’s founder Tim Martin said the UK was introducing a “lockdown by stealth”]

Dardis adds that more Christmas booking cancellations are being made every day, meaning many pubs won’t survive.

There are a lot of individual owner-operators who’ve been running their businesses for years and have thrown the kitchen sink. People have lost their marriages, they’re losing their livelihood. And this is the last straw.

This is the bit that they were desperately clinging onto, and it’s been taken away from them without any support from government.

Dardis adds that the government should permanently leave the VAT rate on hospitality at the current temporarily level of 12.5% [rather than returning to 20% next spring], and scrap business rates as they discourage growth.

The government should introduce a targeted furlough scheme to help firms hit by the current Covid-19 wave, argues the Resolution Foundation thinktank.

It points out that hospitality and leisure firms will lose customers, and employees will lose their jobs, whether new restrictions are imposed or not.

The Coronavirus Job Retention Scheme, which ended in September, can easily be brought back into use quickly to help firms who have to sideline staff, Resolution explain.

But without further action, those who work in hard-hit sectors face ‘huge income falls’ if they lose their jobs, and inadequate sick pay if forced to isolate.

Resolution say:

Whatever the imminent cause of that economic pain, the right policy answer is to provide targeted economic support. Reviving a more limited version of the furlough scheme is the easiest way to do that and protect household living standards.

Going into another Christmas with a wave of the pandemic beginning isn’t what anyone wanted, and nor is more spending on economic support than the Treasury had in mind. But those worst affected by this wave are no less deserving than those hit by previous waves. And, unlike then, we know that boosters offer us a way out of this mess in the months ahead. The past two years have taught us that economic policy can make a huge difference, it’s time it did so once again.

Resolution’s chief executive, Torsten Bell, thinks the Treasury will act within days:

Theatre director Sir Nicholas Hytner warned last night that venues were in “crisis mode”, with shows closing as actors and other staff contracted coronavirus while bookings have “fallen off a cliff”.

The former artistic director of the National Theatre told BBC Newsnight:

“We now surely don’t want to get into a situation where the Government’s investment last year is wasted because the sectors that it has supported collapse in the new year.

“We need to see short term finance, we need to see loans, we need to see VAT looked at again, we need to see business rates looked at again.”

Chef Tom Kerridge called for a return of the drop of VAT to 5% for the hospitality industry [from the current reduced rate of 12.5%], adding:

“Undoubtedly there will be many places that close their doors for Christmas and don’t reopen.”

Evening Standard: Hospitality pleads for help after Chris Whitty call for socialising to be cut

Business groups are urging the government to provide more support for the hospitality sector to help them survive the impact of the omicron variant.

Pubs and restaurants are predicting a slump in takings, as Covid-19 infections hit record highs and cancellations jump in a crucial month for hospitality.

Last night, Professor Chris Whitty, England’s chief medical officer, sent a clear message that people should cut back on socialising in the run-up to Christmas Day, warning that a rise in Covid hospitalisations is “nailed on” after cases hit a record high.

Appearing on Wednesday alongside the prime minister, who has continued to insist formal restrictions on gatherings are unnecessary, Whitty said: “Don’t mix with people you don’t have to.”

The hospitality sector had already warned that Christmas cancellations will cut their festive takings by 40%.

Baroness Ruby McGregor-Smith, CBE, President of the British Chambers of Commerce, has warned Whitt’s advise to the public to ‘de-prioritise social contacts’ will almost certainly have an enormous impact for businesses, particularly in the hospitality sector.

Despite this we still heard no news of any new financial support measures coming from Government to help those businesses, and others badly affected by the current restrictions.

“With the UK recording its highest ever number of Covid cases in a single day, and this being set to rise further in the coming days and weeks, businesses now face the two-punch combination of serious issues with staff absence and plummeting consumer confidence.

“Until now the Treasury has stepped up at every stage of this crisis to help offset restrictions that limited business’ ability to trade fully, which is what makes its complete absence at this crucial moment all the more baffling.

“Businesses have heard nothing from the Treasury since this new round of Covid interventions arrived over a week ago. Not even a rationale has been provided for why it believes no new support is required. They deserve better.

The CBI has also called for ministers to provide support in lockstep with future restrictions.

They say:

Specifically, distributing unspent grants can be done now to alleviate firms hit hardest. If restrictions persist following the January 5 review date, then further business rates relief and other help to reduce fixed costs should be on the table.

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

The Bank of England has a dilemma on its hands as it meets to set interest rates today. With inflation hitting a 10-year high of 5.1% yesterday, more than double its 2% target, there’s pressure to lift borrowing costs from their current record lows.

But the uncertainty over omicron, and the economic impact of the pandemic, means the BoE may well leave rates on hold at 0.1% at noon.

Silvia Dall’Angelo, senior economist at the International Business of Federated Hermes, says the outcome of today’s meeting has been a close call since the BoE resisted raising Bank Rate last month.

“The Bank could well use few more weeks to get more clarity about Omicron’s implications for the outlook and to see whether the recently adopted government’s measures are sufficient to contain its fast rise in the country. In the meantime, additional data on the impact from the expiry of the furlough scheme on the labour market will also become available.

Overall, it makes sense for the Bank of England to keep rates on hold at its upcoming meeting, avoiding rattling markets just before the liquidity-light holiday period. The February meeting – including a full reassessment of the outlook and a press conference to explain the rational underpinning a policy change – seems to offer the MPC a more appropriate set-up for rates lift-off.”

Last night, the US Federal Reserve predicted it would raise interest rates three times in 2022.

In a hawkish pivot on inflation, the Fed also announced it would end its huge stimulus programme more quickly, wrapping up the ‘tapering’ of this bond-buying by next March.

Wall Street took the news well, with the Nasdaq surging 2% in a relief rally. Europe is set to open higher.

Naeem Aslam of Think Markets explains:

Futures in the United States and Europe are up today as investors react positively to the Fed’s decision to speed up its tapering process to tackle surging consumer prices before they get out of control.

Despite liquidity being sucked out of the economy, stock traders are optimistic that the United States will be able to stay on track and achieve sustainable growth in 2022. This is good news for stock markets because economic growth ultimately translates into higher profits for companies, which will mean higher returns for investors in the form of more dividends and rising share prices.

We also get new healthchecks on firms in the UK, US and eurozone, which may show the impact of omicron this month.

And in a busy day for monetary policy, the European Central Bank and the Central Bank of the Republic of Turkey are also meeting. The ECB could dial back its stimulus programme, while the CBRT may press on with its interest rate cuts, despite a currency crash and soaring inflation.

The agenda

• 9am GMT: Flash PMI survey of eurozone businesses in December
• 9.30am GMT: Flash PMI survey of UK businesses in December
  
• 11am GMT: Turkey’s central bank interest rate decision
• Noon GMT: Bank of England interest rate decision
  
• 12.45pm GMT: European Central Bank interest rate decision
  
• 2.45pm GMT: Flash PMI survey of US businesses in December