There is a contrarian view of Britain’s economic outlook. Those who subscribe to it argue that despite fresh government restrictions to combat the Omicron variant, the recovery is robust and the Bank of England will have to raise interest rates when it meets this week.
It is a minority view in the City, but it could find favour inside Threadneedle Street when members of the nine-strong monetary policy committee (MPC) gather, and bring a surprise increase in the base rate from 0.1% to 0.25%.
Three-quarters of investors are now betting on rates staying where they are, but Sanjay Raja, chief UK economist at Deutsche Bank, is not among them. “Fundamentally,” he says “news of the Omicron variant has changed very little on the medium-term economic outlook.”
He points out that inflation is high and heading above 5%, there are record job vacancies and unemployment has continued to fall, even though the furlough scheme ended abruptly at the end of September.
Over at the Bank of England, several hawkish policymakers believe that without higher borrowing costs to calm price increases, workers might start seeking double-digit wage rises, triggering a wage/price spiral and raising the spectre of soaring inflation into 2023 and beyond.
George Buckley, chief economist at Nomura, asks: “Does the Bank really want to be in a position in two to three months’ time where inflation has risen further, the virus is once again in retreat, and yet it has failed to get policy rates off the ground?”
The only reason for another delay would be if Office for National Statistics figures, due this week, shortly before the MPC meets, show a deterioration in the labour market, in particular a rise in unemployment or a slowing of wages growth.
“The labour market is of course the only key data point between now and [the] meeting that could change things for us,” says Raja.
Most economists in the Square Mile have cut the odds of a rate rise in response to the working from home directive issued by Downing Street. A dramatic slowdown in the UK’s GDP growth in October to just 0.1% – amid flagging business and consumer confidence before the government’s restrictions – is another factor that could weigh against a rate rise.
That could mean Bank policymakers are forced to admit that rather than taking the lead among central banks and being the first to increase borrowing costs since the pandemic started, they will play the same game as the Bank of Japan, the People’s Bank of China and the European Central Bank (ECB), and keep credit ultra-cheap.
There is a consensus in the City that the ECB, which also meets on Thursday, will reject calls for tighter monetary policies, especially from Germans afflicted by annual inflation already running at 6%.
ECB president Christine Lagarde has sought to calm those concerned by rising prices, telling them inflation is “transitory” and tighter monetary policy will do little to depress inflationary pressures that date back a year or more in the supply chains of carmakers, laptop assemblers and timber importers.
The US economy is the outlier. It has raced back to rude health on the back of a huge government stimulus package. Federal Reserve chief Jerome Powell said recently that inflation was “not transitory” and Fed action was needed to tame rising prices.
After US inflation hit 6.8% in November, its highest level since 1982, analysts now expect four or even six rate rises by the end of 2023.
But US economic growth has begun to wane, and Omicron could prove devastating for the large numbers of unvaccinated Americans. The outlook remains uncertain.
