The Pound has strengthened on Friday and is on track to reach its biggest weekly rise since October following the Bank of England’s announcement on Thursday to raise interest rates. The BoE is the first major central bank to raise interest rates since the start of the pandemic. This week, the Federal Reserve has also signalled its intention to tighten its policy in 2022, while the European Central Bank has taken small steps towards rolling back its pandemic-era stimulus on Thursday. It has started by wrapping up its pandemic bond purchases next March. But the Bank does not appear to be raising interest rates soon.
UK interest rates rise to 0.25%
The Bank of England surprised markets on Thursday by raising interest rates to 0.25%. The pound, gilt yields, and bank stocks rose in response of the positive news.
On Friday (17 December 2021), strong UK retail sales data for November along with higher inflation have increased expectations of a February rate hike too.
The latest positive data on retail sales and resilient consumer confidence have confirmed that consumer demand remains strong. British retail sales rose by 1.4% in November, following strong trading on Black Friday and in the period leading up to Christmas, according to the Office for National Statistics. Retail sales are 4.7% higher than a year before when many shops were closed due to the lockdown. Spending on clothes rose by 2.9%, while other stores such as computer, toy and jewellery shops had a 2.8% growth. With people returning to actual stores, malls and the high street, online retail sales fell to its lowest since the lockdown in March 2020.
Retail sales rose in October too, with consumer spending remaining strong before the Omicron variant hit the economy. According to Heather Bovill, deputy director of the ONS, “Omicron is now casting a shadow over the economy, of course. The work-from-home guidance introduced last week under plan B measures in England has left city centres depopulated, and hospitality firms warn that trading had plunged.”
Expect more rate hikes BoE's Huw Pill says
With inflation shooting higher, the Bank of England chief economist Huw Pill said that the central bank would need to raise interest rates further. Speaking on Friday, Pill explained that the rate increase from 0.1% to 0.25% on Thursday will not be the last and there will be a lot more rate hikes, if inflation remains at its current level. Pill noted that inflation pressures possibly centred around wage pressures in a shrinking labour market will prove persistent.
The hike before Christmas
Deutsche Bank has called Thursday’s Bank of England rate rise “the hike before Christmas.” Deutsche bank’s UK economist, Sanjay Raja, stated that “prudence around inflation” has forced BoE into action. As she clarified, by acting now, the central bank has maximised its chances of meeting their target in two- or three-years’ time.
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