Economic Highlights

The Bank of England’s decision to raise the base rate by 0.15% to 0.25% caught most economists on the hop, especially given that the Omicron variant had appeared since the last meeting. However, the threat of higher inflation and the need to be seen to be doing something about it seems to have forced the hand of the Monetary Policy Commitee. The previous day’s Consumer Price data showed headline inflation jumping from 4.2% in October to 5.1% in November, against an expected level of 4.8%. The Bank finds itself in a bit of a bind, though, because Omicron already seems to be depressing activity, as was seen in the latest purchasing manager survey data. The services reading dropped sharply from 58.5 to 53.2, indicative of a sharp slowdown, although still in growth territory.

No rate rise from the Federal Reserve yet, because it has to taper its asset purchase programme first. The taper was accelerated and purchases will now end in March. The market now puts the odds on a rate rise in March at evens, with a high probability of one coming in May, to be followed by another two rises before the end of 2022. Inflation pressure in the pipeline might well have influenced the Fed’s thinking, with Producer Prices rising 9.6% in the year to November. Retail Sales (Control Group) were weaker than expected in November, falling 0.1% against an expected rise of 0.7%. Much of the blame appears to have fallen on product shortages, especially for electronics, although the fact that inflation rates and now higher than wage growth cannot be helping. High petrol prices will also be sapping demand from other categories.

The ECB seems to be the most sanguine of the major central banks when it comes the inflation threat, with no plans to raise rates within the next 12 months. However, it has begun the gradual process of normalising policy by confirming the end of its Pandemic Emergency (asset) Purchase Programme in March. There will be plenty of encouragement to tighten policy emanating from Germany’s Bundesbank following a German Producer Price Index print of +19.2% in the year to November. The eurozone services PMI fell from 55.9 to 53.3 in the latest reading, although this will have reflected the latest Delta wave rather than Omicron, which hit the Continent a bit later.

Further evidence of a decelerating economy came in the form of Retail Sales for November (+13.7% year-on-year vs +14.9% in October), Industrial Production (+10.1% vs 10.9%) and Fixed Asset investment (+5.2% vs +6.1%). Thus China’s central bank remains the only major one to be loosening policy. The recent cut in the capital requirement for banks (which frees up funds for lending) has been followed by a small, but directionally significant and unexpected cut, in the 1-Year Loan Prime Rate from 3.85% to 3.8%.