By David Milliken
LONDON (Reuters) -The economic impact from COVID-19 has faded since the start of the pandemic but still remains strong, Bank of England Governor Andrew Bailey said on Wednesday, when asked how to assess news of the Omicron variant of coronavirus.
Financial markets have pared back their expectations of a Bank of England rate rise on Dec. 16 since information emerged about the new variant last week, and now see a two thirds chance of a rate rise, down from three quarters before.
The probability of a BoE move was barely 50% on Tuesday before U.S. Federal Reserve Chair Jerome Powell cast doubt on the transitory nature of inflation pressures and suggested the Fed might need to slow its bond purchases faster than planned.
"Direct economic effects of COVID have attenuated a lot since the fall in GDP in the second quarter of last year, when we went off a cliff," Bailey said.
"However, there are still impacts that we are feeling from COVID quite strongly," he added in a question and answer session hosted by Britain's Institute and Faculty of Actuaries which focused mostly on insurance regulation.
British consumer price inflation hit a 10-year high of 4.2% in October and the BoE expects it to reach around 5% in the second quarter of 2022.
Bailey noted the inflationary pressure from supply chain difficulties and increased demand for consumer goods instead of services during the pandemic.
But he did not say if he thought the Omicron variant was likely to prolong these problems, sticking close to language from the central bank's November policy statement.
"Even now, services are recovering but we have still got quite a long way to go. That has put quite a strain on supply chains around the world," he said, adding that the manufacturing and shipping of goods from east Asia could be disrupted by more lockdowns.
Catherine Mann, an external member of the BoE's Monetary Policy Committee, said on Tuesday that the Omicron variant could add to inflation pressures for these reasons.
(Reporting by David Milliken and Huw Jones, editing by Andy Bruce and Ed Osmond)