Economists surprised by UK interest rates rise | David Sapsted

Although an increase had been expected at some stage after the latest data showed the UK's inflation rate had hit a ten-year high of 5.1%, economists' expectations had been that the rise would be delayed at least until February to enable the effects on the economy of the new omicron variant of Covid-19 to be assessed.But the bank's Monetary Policy Committee (MPC) voted 8-1 in favour of a rates rise, considering that the pressure exerted by the surge in inflation outweighed the economic risks from the new variant.The effect of the omicron variantThe inflation rise in November to a figure more than double the government's target of 2% has been largely attributed to soaring energy prices and global supply chain problems.In a statement, the bank accepted that omicron posed risks to economic activity but said that while global asset prices had initially fallen as fears over the new variant had emerged, they had since largely recovered.Meanwhile, the statement added, consumer price inflation in advanced economies had risen by more than expected. "The omicron variant poses downside risks to activity in early 2022, although the balance of its effects on demand and supply, and hence on medium-term global inflationary pressures, is unclear. Global cost pressures have remained strong."CBI:at least two more interest rate increases could be comingAlpesh Paleja, lead economist at the Confederation of British Industry (CBI), said the MPC's decision to raise interest rates signalled that the bank wants "to get off on the front foot in tackling rising inflation" and suggested at least two more increases could be in the offing.“However," he added, "the emergence of the Omicron variant has raised uncertainty over the near-term outlook, so the MPC will likely move more cautiously. We could even see a return to the committee’s holding pattern on monetary policy, if there are strong signs of either the virus or Plan B restrictions dampening activity and price pressures“But in either scenario, it’s important to remember the overall stance of monetary policy will remain very accommodative going forward.”BCC: vital to provide solutions to supply and labour shortagesSuren Thiru, head of economics at the British Chambers of Commerce (BCC), said the decision on rates was given mounting uncertainty over the economic impact of the omicron variant."While today’s rate increase may have little effect on most firms, many will view this as the first step in a longer policy movement – not as a partial reversal of last year’s cut," he said.“While policymakers are facing a tricky trade-off between surging inflation and a stalling recovery, with the current inflationary spike mostly driven by global factors, higher interest rates will do little to curb further increases in inflation."Instead, it is vital more than ever that the government’s Supply Chain Advisory Group and Industry Taskforce start to provide some practical solutions to the supply and labour shortages that are continuing to stoke inflationary pressures."JP Morgan Chase Global Research ReportLast week, a forecast from JP Morgan Chase Global Research predicted that 2022 would "be the year of a full global recovery, an end of the global pandemic, and a return to normal conditions we had prior to the Covid-19 outbreak".The report foresaw "a return of global mobility, and a release of pent-up demand from consumers".Marko Kolanovic, chief global markets strategist and co-head of global research at the US investment bank, said that the report's bullish forecast was "warranted by achieving broad population immunity and with the help of human ingenuity, such as new therapeutics expected to be broadly available in 2022".He added: "We believe this will produce a strong cyclical recovery, a return of global mobility, and strong growth in consumer and corporate spending, within the backdrop of still-easy monetary policy."However, Mr Kolanovic also warned of risks on the horizon. "They include increased geopolitical tensions in Europe and Asia, a looming energy crisis, uncertainties around high inflation, and normalization of monetary policy."Read more news and views from David Sapsted.  Subscribe to Relocate Extra, our monthly newsletter, to get all the latest international assignments and global mobility news.Relocate’s new Global Mobility Toolkit provides free information, practical advice and support for HR, global mobility managers and global teams operating overseas.Access hundreds of global services and suppliers in our Online Directory

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