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With the number of Omicron infections being driven up by what Prime Minister Boris Johnson has described as the ‘remorseless logic’ of exponential growth, the chances of a UK interest rate rise this week are heading in the exact opposite direction.

As the government sets about doubling the speed of its Covid-19 booster programme and millions of Britons have to work from home once again, the Bank of England is rapidly reassessing whether now is the time to start its long-awaited rate hiking programme.

Will the Bank of England raise rates this week?

“Even though there’s a strong chance that Wednesday’s inflation data will be a blowout, the Bank is now almost certain to ignore it and delay a rate rise once again,” said Jay Mawji, managing director for global liquidity at IX Prime. “UK equities are holding up well as the markets conclude that Britain’s economy is better equipped to function under the new ‘lockdown lite’ restrictions. But with the odds of a December interest rate rise now looking longer than those of a White Christmas, sterling is swooning.”

An Omicron tidal wave may be coming but the consensus among traders this week is that the markets have been extensively waterproofed. Turns of phrase that would once have caused a mass sell-off are increasingly being shrugged off. The announcement of the extensive booster programme will certainly have helped counteract concerns about the new variant.

Why has GBP been dropping?

Sterling, however, has been stung particularly hard by the Omicron variant, with few now expecting the Monetary Policy Committee to raise interest rates this week. As far as an increase in bank rate is concerned, we’ve gone from sure thing to status quo in a matter of days. With the Omicron variant now going through the gears, it’s hard to see the Bank of England hiking rates despite the fact inflation is predicted to rise even further.

For now, it appears inflation will be given a free pass to wreak havoc. UK monetary policy is being caught between a rock and the proverbial hard place.

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“The Bank of England is in a…delicate position – it’s at various times in the last few months talked up the need to tackle inflation and simultaneously refrained from doing so,” said Neil Wilson, Chief Market Analyst at Markets.com. “Labour market indicators suggest hawkishness is not going to be a problem, but the onset of new omicron restrictions could stay its hand. Inflation figures due on Wednesday will be used by the market as a proxy for a decision, but we know that the MPC is not necessarily minded to hike just because prices are rising. And we know that despite high levels of inflation in the Eurozone the ECB is not going to raise rates next year, so expect more dovishness.”

If recent remarks made by Michael Saunders – one of two MPC members who voted to raise interest rates last month – are anything to go by, traders won’t be expecting the Bank of England to become the world’s first major central bank to raise interest rates from their historic low.

“There’s no doubt that inflation is causing a persistent headache for central bankers, but with increased uncertainty around Covid-19, it may well be the case that the Bank has missed its opportunity to act,” observed Shafiq Shabir, head of electronic trading at Intertrader. “In reality, it is still early days with the emergence of Omicron, and we won’t know its economic impact for some time, while labour shortages continue to persist. It’s easy to see the MPC taking a “wait and see” approach until more evidence emerges. Should we see a rate rise, it would no doubt send a seismic shock through jittery financial markets – quite the turnaround from November.”

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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