Above: It was just last month that Saunders told the Treasury Select Committee the time to raise rates was "now". Image copyright Pound Sterling Live, courtesy of Parliament.tv
The Bank of England is all but likely to swerve a December interest rate hike after a member of the Monetary Policy Committee (MPC) said the Omicron variant was reason to be more cautious.
UK inflation is surging well ahead of the Bank's 2.0% target but MPC member Michael Saunders said Omicron would be a key consideration for the December 16 decision.
He said he sees "some advantages" in waiting due to Omicron, though also says delay could be costly too.
"Sounds like Saunders is cooling on December decision on rates," says Michael Hewson, Chief Mareket Analyst at CMC Markets.
"The health impact from Omicron is still unknown, but markets certainly do not like the uncertainty," says Kjetil Martinsen, Chief Economist at Swedbank. "Bank of England’s Saunders earlier today also indicated their worries about the potential impact on the UK economy, shaving off the market’s view on a December rate hike."
Above: Sterling heads lower on fading rate hike expectations, more recently linked to the Omicron variant. Daily chart for GBP/EUR (top) and GBP/USD (bottom).
- Reference rates at publication:
GBP/EUR: 1.1730 \ GBP/USD: 1.3265
- High street bank rates (indicative): 1.1500 \ 1.2300
- Payment specialist rates (indicative: 1.1670 \ 1.3200
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Saunders emerged as one of the 'hawkish' members of the MPC in July when he began advocating the need for higher interest rates, which ultimately lead the market towards pricing a November rate hike.
The Pound rose in tandem with these building expectations.
But it fell after the Bank failed to raise rates in November with market attention understandably then falling on the December meeting as the next potential date for a hike.
The emergence of the Omicron variant has lead the markets to rapidly price this prospect out, even before Saunders spoke, and this has been associated with weakness in the Pound to Euro exchange rate of late.
"GBP weakening after Saunders wavering on his hawkish position," says Hewson. GBP/EUR has trended lower from a high at 1.1932 on November 22 to 1.1733 at the time of writing.
Pound Sterling Live wrote on Thursday that expectations for a Bank hike were at 33% and therefore were a hike to emerge it would be a surprise that could move the Pound higher.
Odds had been elevated during mid-November following an appearance by Saunders and other MPC members before the Treasury Select Committee, where they all expressed unease about surging UK inflation levels.
Saunders actually told lawmakers the general pickup in inflation is high enough to justify raising rates now.
But his latest views will finally put to bed expectations for a 2021 hike.
He did however also say the UK will probably need more tightening soon, which would likely keep alive market expectations for a February 03 rate rise.
Indeed, he said more than one rate rise will be needed on the horizon.
But the market will be coy to be too aggressive on expecting rate hikes as Hewson observes the "BoE will always find a reason to procrastinate".