BoE becomes first major central bank to raise rates since pandemic - Reuters

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• BoE votes 8-1 to raise UK interest rates to 0.25% from 0.1%
• BoE is first major c.bank to raise rates since pandemic began
• UK inflation is forecast to peak at 6% in April 2022
• Omicron to hurt near-term growth, inflation impact unclear
• More persistent domestic inflation and job market pressures seen

LONDON, Dec 16 (Reuters) - The Bank of England on Thursday became the world's first major central bank to raise borrowing costs since the coronavirus pandemic hammered the global economy, as it said inflation was likely to hit 6% in April - three times its target level.

In a second surprise for investors in six weeks, the BoE said it had to act, even as the Omicron coronavirus variant sweeps Britain, because it saw warning signs that underlying inflation pressure might become long-lasting.

"The labour market is tight and has continued to tighten, and there are some signs of greater persistence in domestic cost and price pressures," the BoE said.

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"Although the Omicron variant is likely to weigh on near-term activity, its impact on medium-term inflationary pressures is unclear at this stage."

Sterling jumped almost a full cent against the U.S. dollar to its highest since Nov. 30, and interest-rate sensitive two-year gilt yields rose by 9 basis points on the day to 0.58%, their highest since Dec. 1.

Most economists polled by Reuters had expected the BoE's Monetary Policy Committee to keep Bank Rate at 0.1% due to the Omicron variant of the coronavirus which caused a record number of COVID-19 cases in Britain on Wednesday.

"The MPC's decision to hike Bank Rate today, before it knows the full extent of the economic damage wrought by the surging Omicron variant, underlines how worried it is about the outlook for inflation and the risk that inflation expectations would de-anchor if it did nothing," Pantheon Macroeconomics analyst Samuel Tombs said.

The nine-member MPC voted 8-1 to raise Bank Rate to 0.25% from 0.1%, with external member Silvana Tenreyro providing the only dissenting voice.

The MPC pointed to the likelihood of further rate hikes ahead.

"The Committee continues to judge that there are two-sided risks around the inflation outlook in the medium term, but that some modest tightening of monetary policy over the forecast period is likely to be necessary to meet the 2% inflation target sustainably," it said.

Investors were fully pricing in another rise in Bank Rate to 0.5% by March's meeting and that it would hit 1% by September.

SHORT-TERM OMICRON HIT SEEN

The BoE cut its growth forecasts for December and the first quarter of 2022 because of Omicron which could lead to "a very high number of infections over a very short period."

A closely watched survey of purchasing managers published earlier on Thursday showed a hit to hospitality and travel companies this month, sending private sector growth to a 10-month low. read more

But the BoE also said Britain and the world economy were in a "materially different" situation than at the start of the pandemic, with inflation now elevated.

It focused more on "upside risks" around pay trends and said there was little sign of a jump in unemployment after the end of the government's job-supporting furlough scheme on Sept. 30.

The British central bank also wrong-footed many investors on Nov. 4 when it kept Bank Rate on hold to give itself more time to see the extent of any hit to the labour market from the end of the scheme.

At its December meeting, the MPC voted 9-0 to keep the central bank's government bond-buying programme at its target size of 875 billion pounds ($1.16 trillion). The BoE has also bought 20 billion pounds of corporate bonds.

Thursday's rate hike put the BoE ahead of the U.S. Federal Reserve. On Wednesday, the Fed said it was speeding up a phase-out of its bond-buying stimulus, in a first step ahead of possibly three interest rate rises in 2022. read more

The European Central Bank and the Bank of Japan are further away from raising borrowing costs.

The ECB on Thursday cut back its stimulus further on but promised generous support for the euro zone's economy in 2022.

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Reporting by David Milliken and Andy Bruce; Writing by William Schomberg; Editing by Hugh Lawson

Our Standards: The Thomson Reuters Trust Principles.

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