Written by: Susannah Streeter | Hargreaves Lansdown
Faced with such a high inflation reading, and with forecasts that the only way is up, the Bank of England would ordinarily be expected to call time on the cheap money party and raise interest rates. But with the recovery far from being in full swing and the omicron variant an unruly guest, set to knock back confidence further for many sectors, policymakers may be hot and bothered but are likely to stay in wait-and-see mode tomorrow. With a possible Plan C on the cards, and closures of hospitality and retail being considered if hospital admissions soar, as well as a severe income squeeze taking hold, consumer sentiment and spending could take a fresh hit. What is pretty certain is that even if ultra-low rates stay put right now, with prices running so hot, there won’t be an extended lock-in with expectations that February is likely to see rates lift.
Prices don’t look so transitory right now and seem set to linger for much longer and the Federal Reserve seems much more inclined to bring the cheap money binge to an end. Focus will shift to the Fed’s decision on monetary policy later and with fresh indications that inflation is sizzling hot with producer prices reaching a record annual increase of 9.6% in November, there are expectations that last orders will be called on its mass bond buying programme much sooner, and that an interest rate rise could be brought forward next year. The spread of Omicron is proving a headache to nurse in the US as well, along with ongoing supply chain pains, but with growth much more buoyant than in the UK, withdrawing support doesn’t appear to be quite so much of a dilemma.