New restrictions aimed at limiting the spread of the Omicron variant will delay an interest rate hike from the Bank of England despite signs that government measures will raise the cost of living for hard-pressed consumers, the city believes.
The pound fell in the currency markets, expecting the Threadneedle Street Monetary Policy Committee to avoid the first increase in borrowing costs since the start of the pandemic, and instead join the Treasury in taking an approach wait-and-see towards Omicron.
The government’s plan B measures, announced on Wednesday, will see workers asked to stay away from their desks and Covid passes made mandatory in larger places. The restrictions are expected to increase the cost of living as spending shifts back from online shopping to online shopping, pushing up the price of consumer goods as demand increases.
However, fears of an economic slowdown mean that the Bank of England is now less likely to intervene to curb inflation.
At the start of last week, the City thought there was a 70% chance that the Bank would act to counter the inflationary pressures hitting living standards by raising interest rates from 0.1% to 0.25%. . This possibility had fallen to 46% before the announcement of Plan B, and fell further to 40% on Thursday.
Paul Dales, UK chief economist at Capital Economics, said: “While the emergence of the Omicron Covid-19 variant has increased the downside risks to our GDP forecast, it arguably has increased the upside risks. for our CPI inflation forecast. “
Rishi Sunak will monitor the impact of the restrictions announced this week but has no plans to increase financial support at this point as the possibility of a tightening of restrictions this week in England was already factored into his plans.
Groups representing hospitality, travel and retail – the sectors most likely to be affected by the restrictions – are asking for more help from the government, but the Chancellor will likely only react if tighter restrictions are imposed or if the current restrictions last for an extended period.
The latest flash economy estimates have detected signs of an Omicron effect, with spending on credit and debit cards increasing on Black Friday, but a drop in the number of people eating out.
“The transmissibility, severity and ability of Omicron to evade vaccines are still unknown,” Dales said. “But if Omicron got the government to shut down non-essential retail businesses, hotels and schools, we think GDP would drop by about 3%. As has been the case with previous closings, this would boost the demand for goods relative to the demand for services, which could keep goods inflation higher for longer. “
In the meantime, analysts believe that Plan B measures will have only a modest impact on the economy’s growth rate.
Josie Dent, a British economist at the Center for Economics and Business Research, said working from home will lead to a dramatic change in the behavior of commuters and therefore consumers in the city center. She estimated the forecast would reach spending of £ 500million in five selected English cities over the next month – London, Manchester, Newcastle, Nottingham and Milton Keynes.
“On the other hand, we believe that mask-wearing restrictions and Covid certification measures are unlikely to involve significant economic costs overall, as consumers and businesses have increasingly adapted. to such measures throughout the pandemic. However, a short-term cost could be felt by companies when they implement such measures in the coming days.
‘Meanwhile, regardless of Plan B, heightened nervousness over the new variant and tighter travel restrictions are expected to result in a loss of £ 0.9bn in UK hospitality income this month and £ 0.4 billion in inbound travel spending. “
The ONS said Black Friday sales pushed credit and debit card spending in Britain to its highest level since before the first lockdown in March 2020, but restaurant reservations have fallen to their highest. low since restrictions on indoor hospitality eased in May.
In his assessment of his recent forecast record, the Office for Budget Responsibility – the independent body responsible for the government’s economic and financial health records – said businesses had become better able to cope with even difficult restrictions.
“As the pandemic unfolded, households and businesses increasingly adapted to the virus and associated restrictions, with consumers moving their shopping online, businesses making premises safe from Covid and employees. adapting more to remote work. As a result, while production fell about 25% below pre-pandemic levels in April 2020, it was only 9% lower in January 2021, although both were spent in a nationwide lockdown. full. “