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Omicron and ınflation effect in the monetary policy spectrum

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Current conditions in the interest rate projection… The position of England in the week full of central banks should also be mentioned, because before Omicron caused some measures, it was seen as the closest Central bank to a rate hike. Conditions have changed a bit, in fact, it would be more accurate to say that they changed shape; Due to concerns about the Omicron variant, no change in monetary policy is expected at this meeting. In the last meeting of 2021, the Bank of England will not give much reference to the interest rate spectrum in this regard, we expect it to remain pending. In fact, the decision to keep the interest rates constant can be made only for this month, even within the consensus. For a rate action in early 2022, we might consider a move as a protection against inflation if Omicron doesn’t worsen conditions.

 

UK CPI, BOE survey-based inflation expectations and BOE interest rate… Source: Bloomberg

 

Omicron variant and restriction measures… The emergence of the Omicron variant and the government’s decision to tighten restrictions significantly reduced the chances of the Bank of England raising interest rates this month. Therefore, for this month, we expect the Bank to hold back a little in its general policy transformation and make a due diligence. The decision to keep interest rates constant in the MPC can be taken unanimously.

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Conditions for an increase in interest rates… The picture revealed by the economic data releases should contain an expected growth performance and an increase in inflation. The conditions constituting the conditions for the rate hike in the coming months would have been stronger than the variables prevailing in November, had the variant variables not been a factor of reservation. Indeed, Omicron added a lot more ambiguity to the look. Before changing policy, it may be necessary to learn more about the variant’s impact on the economy, against the risk of a need for a later step back. An increase is possible in the foreseeable future, but there will likely be no movement now.

 

UK GDP, service sector growth and industrial production… Source: Bloomberg

 

Conclusion? The December meeting will include a delay in tightening, but we do not expect a rapid change in overall strategy. If Omicron’s public health impacts remain in the zone of control, unless, for example, the health system is overburdened, such as full of hospitals, the BOE may move to the point of raising rates in the coming months. We think that the current situation will cause a short delay, which is relevant for observing the results and effects.

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