Bank of England keeps main rate on hold at 5% in wake of US Fed cut

The Bank of England has kept its main interest rate unchanged at 5% despite a big cut from the US Federal Reserve, its first since the onset of the coronavirus pandemic more than four years ago.

The decision Thursday was widely expected amid ongoing concerns about inflation within the bank's monetary policy committee, particularly the elevated levels in the crucial services sector, which accounts for around 80% of the British economy.

Figures on Wednesday showed that inflation overall in the UK held steady at an annual rate of 2.2% in August, still above the bank's goal.

The bank, which last month cut interest rates for the first time since the pandemic, is widely expected to reduce borrowing costs again at its next meeting in November, especially as it will have details of the government's budget on Oct 30.

 

On Wednesday, the Fed cut its main interest by half of a percentage point to roughly 4.8% from a two-decade high of 5.3%, where it had stood for 14 months. It also signalled that there will be more cuts to come in the next few months.

Policy doves fear ECB falling behind

A big interest rate cut from the US Federal Reserve on Wednesday raised bets on further policy easing at the European Central Bank (ECB) in October but this is still not the most likely outcome given different economic realities.
 

The ECB has already cut interest rates in June and earlier this month, and many at the bank have hinted at steady, quarterly rate cuts ahead to make sure inflation is defeated on a durable basis. While the Fed’s apparent rush lends some support to arguments that the ECB is falling behind the curve, the fundamental economics have not changed overnight, so policy hawks on the Governing Council can make an argument for waiting until December.
 

“That the ECB needs to cut in October because of what the Fed did is a ridiculous argument that wouldn’t fly on the Governing Council,” Dirk Schumacher, an economist at Natixis, said. “The only way to argue that is to say that it (the Fed cut) will change euro zone data and that may be the case but we haven’t seen it yet.” (Reuters)