The Bank of England’s leading inflation hawk said there could be advantages from waiting for more data on how the omicron variant of the coronavirus will impact the U.K. economy before raising interest rates.
Michael Saunders said omicron will be a key issue at the BOE’s next meeting on Dec. 16, adding to speculation the central bank may delay a move until next year as it awaits more news on the new strain.
Markets pared bets on a December hike after his speech on Friday. Investors now anticipate a 33% chance of such a move, down from 56% on Thursday. Last month, markets signaled that tightening this month was all but certain.
“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.
Still, Saunders also cautioned there was a cost in delaying a hike, saying that could allow the U.K.’s labor market to tighten even more, pushing inflation further above target. That may mean the BOE has to move even more aggressively next year with a more “abrupt and painful” tightening, as opposed to the “limited” hikes that would be needed if it acted sooner, he said.
“For me, the balance between these considerations is likely to be a key factor at the December meeting,” he said.
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