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Bank of England decision to increase rates the ultimate curveball

Bank of England rate rise a suprise

With the Omicron variant wreaking havoc across countless sectors of the economy, the Bank of England’s decision to raise bank rate on Thursday was the ultimate curveball.

Wednesday’s CPI figure hitting 5.1% was a bolt from the blue and clearly focused minds on the Monetary Policy Committee. It went from Amber to Red alert overnight.

In its minutes, the Bank stated that “although the Omicron variant is likely to weigh on near-term activity, its impact on medium-term inflationary pressures is unclear at this stage”.

Translate: the Bank of England is betting that the Omicron variant will have a short and sharp impact on the economy, and that the greater concern remains the medium-term inflation outlook.

Managing inflation is, of course, the Monetary Policy Committee’s sole remit and raison d’être. But the stakes are high. Sky high.

Sentiment among businesses and consumers alike has been hit extremely hard over the past fortnight and this rate rise will be another hammer blow.

With the Omicron variant on a rampage, for many it feels like the roof is coming down on the UK economy. But Threadneedle Street is clearly far more concerned about the pace at which inflation is rising — and “signs of greater persistence in domestic cost and price pressures.”

Interestingly, the minutes stated that “in the run-up to its policy decision, the Committee had been briefed by the Chief Medical Officer for England on recent Covid developments, including the risks to public health from the Omicron variant”.

Clearly the Chief Medical Officer alleviated concerns about the inevitable Omicron downside.

Though the decision to hike was a surprise one, many will be glad that the Bank has finally shown it has teeth in terms of dealing with the inflationary threat. It was bold — and bold could give markets a fillip once they have digested the decision.

If there’s one winner, it was the Pound, which understandably leapt in the aftermath of the decision.

Sterling soared at the same time as many traders in the UK and around the world will have been, well, scratching their heads.

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