Rates rise as Bank of England seeks to tell markets it cares about inflation spike it can’t do much about

Last time around the surprise was that the Bank of England didn’t act. This time there were quite a few raised eyebrows when it became the first of the big central banks to impose a Covid rate hike.

The Omicron variant is starting to freeze the economy again, with significant numbers of Britons putting themselves into lockdown even as the government resists doing the same out of a greater fear of its own fractious backbenchers.

This made the decision to increase rates – to 0.25 per cent from 0.1 per cent – look a lot more finely balanced than it did prior to the new variant’s sudden emergence and shockingly rapid spread.

Jack Leslie, senior economist at the Resolution Foundation, went so far as to describe the move as “odd” given “the economic damage currently being caused by Omicron”.

Leslie pointed out that it is unlikely to make a great deal of impact on household budgets or spending. Most mortgages are fixed these days and the era of ultra-cheap deals for those looking to obtain a fresh deal when theirs is up ended some time ago. Rate rises have much less of an impact on other forms of consumer credit.

Remember that rates too, at 0.25 per cent, are still extraordinarily low by historic standards. Business groups were therefore relatively sanguine. They knew this was likely coming.

All that being said, the inflation the Bank’s Monetary Policy Committee (MPC) is, in theory, seeking to curtail is, largely being driven by global pressures, which it is powerless to influence. The same goes for the other sizeable central banks. A sage economist of my acquaintance says Canada will likely be the next to go.

They’ve all been slowing down asset purchases, the favoured tactic for stimulating economies by monetary means with rates on the floor.

The Bank is also the first to bring those to a firm halt. Nearly all its doves acquired the claws of hawks this time. The vote – at 8 to 1 – strayed from unanimity but they’re unlikely to get sheathed soon.

The real point of the MPC’s move here was to remind the City that it takes inflation seriously and means it when it says it is prepared to act to (at least try to) curtail it. Now and in the future.

This rise, as much as anything else, matters because of its messaging. The MPC might not be able to influence the causes of inflation, but it can influence the financial markets. It can send the message that it takes the current inflation spike seriously and is prepared to act, and act again, to address it (even though it stood pat last time). By doing so, it can hope to prevent the markets from contributing to the problem.

The pound duly shimmied its way higher. The stock market did the same. The message was heard.

We will almost certainly be here again before long, if only to reinforce the message that has already been sent.

Inflation isn’t going to come down anytime soon. To the contrary. Maybe the causes will fix themselves before predictions of 1 per cent rates are realised. But maybe they don’t. Uncertainty hangs like a pall over everything. Count on that continuing for as long as the virus thumbs its nose at governments and central banks and financial markets alike.

So the economic new year promises to be a rocky one. Positive news on combatting Covid would help it to find its way into calmer waters, potentially easing some of those inflationary pressures and the need for further rises. Here’s hoping.

In the meantime, we’re left with the Bank to try and stop the ship from rocking too much. That’s about the best we can hope for given the government’s privations.