- Covid cases have been rising rapidly with the seasonal change, leading to a return of activity restrictions, consistent with our long-held view. We still believe the breadth and intensity of these measures are likely to become more severe through the winter.
- The omicron-variant lends its name to the known risk of a vaccine-evasive strain. If proven, the risk-minimising political reaction function may tighten far more. The BoE should resist hiking into this, lest it compounds pains excessively.
By Philip Rush
In his first speech as Chief Economist, Huw Pill explains how he views the impact Covid has had on the economy. He says that, provided the jobs market continues to be strong, he thinks interest rates will need to gradually increase in the coming months, to make sure inflation comes back down from current high levels.
However he points out that the economic picture is still uncertain, so the Bank of England can’t give precise guarantees on what will happen to interest rates, especially further into the future than the coming months. That will depend on how the economy performs. And with high uncertainty, the Bank of England should take a cautious approach to policy, assessing each decision on a step-by-step basis.
- Over the past week, politics captured our attention with Germany’s coalition building and tensions between the US and China. The Riksbank recognised the need to eventually hike, and we explored why the impact of BoE policy on the RPI (MIPs) has weakened.
- Next week should reveal the peak in Euro area inflation. Our Nov-21 forecast has ground higher and now stands at 4.5%, whereas the current consensus has only reached 4.4%.