BoE's Pill: A resurgence of the pandemic would mean we have to be more cautious

Bank of England Chief Economist Huw Pill said on Friday that a resurgence of the pandemic would mean that the bank would have to be more cautious, according to Reuters. There are risks on two sides for the economy, he added. 

Elsewhere, on QE, Pill said that the idea that there would not be any run-off might be optimistic and he hoped any impact would be modest. Moreover, Pill noted that he hoped the UK could return to having a positive real interest rate. 

Market Reaction

GBP has not seen a reaction to Pill's comments. But they do highlight the fact that the latest Covid-19 developments are likely to strengthen the argument made by more dovish BoE members for patience when it comes to rate hikes.

"If the world is about to be engulfed by a new, potentially vaccine resistance variant of Covid-19, is now the time to be raising interest rates?" is a powerful argument that will likely be made against a rate hike next month. 

UK money markets seem to be viewing the likelihood of a December rate hike as diminished. The three-month sterling LIBOR future contract for December 2021 (a proxy for where investors expect the BoE's interest rate to be next month) rose another 2.5 point on Friday to 99.84. That marks a 6 point rise on the week and it even hit highs at 0.9985 earlier in the session.

For reference, the December 2021 LIBOR future would need to be trading under 99.75 to imply that a 15bps rate hike (to 0.25%) was fully priced in by the market ahead of next week's policy decision. At 99.84, only a few bps of tightening is implied, implying a low likelihood of a rate hike in December.