The Bank of England could benefit from waiting to see the impact of the Omicron coronavirus variant on the UK economy before raising interest rates, one of its policymakers has said.
Michael Saunders said he believed there could be advantages from taking no action when the central bank meets to set borrowing costs in just under two weeks’ time.
Saunders, an external member of the Bank’s nine-strong monetary policy committee, opted to raise interest rates at its last meeting in November. But he was outvoted and the MPC unexpectedly held back from raising rates for the first time since the spread of Covid-19, instead leaving rates unchanged at an all-time low of 0.1%.
“At present, given the new Omicron Covid variant has only been detected quite recently, there could be particular advantages in waiting to see more evidence on its possible effects on public health outcomes and hence on the economy,” Saunders said in an online speech on Friday.
Covid cases
He said, however, there could also be potential costs from delaying a rate rise if the variant turned out to have a limited impact on demand for goods and services amid rising inflationary pressures across the British economy.
“There are potential costs and benefits of waiting for more data. You can see the potential benefit; you get to learn a bit more about how Omicron might effect the economy,” he said.
“The potential cost is that inflation expectations have drifted up recently, especially among households and financial markets. I have some concern about that.”
Saunders said holding interest rates at 0.1% could further add to expectations for higher levels of inflation, if Omicron turns out to be relatively benign for the economy.
The new variant could also increase disruption for global supply chains, exacerbating existing bottlenecks in a development that could add to inflationary pressures.
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“[That would] mean subsequently tightening policy turns out to be more abrupt, more painful than might otherwise be the case,” he said.
Financial markets were pricing a 33% chance of a December rise in interest rates after the speech, down from about 75% last week before news of the Omicron variant first broke.
Saunders was one of two members of the MPC who voted in early November for an immediate rise in interest rates to 0.25%. The rate-setting panel’s next decision will be announced on 16 December.
“If it wasn’t for Omicron you could probably guess what the direction of my policy vote would be,” he said.
