The Bank of England has kept its main interest rate unchanged at 5% despite the US Federal Reserve’s major cuts, the first time since the start of the coronavirus pandemic more than four years ago.
The decision on Thursday was widely expected amid ongoing concerns about inflation in the bank’s monetary policy committee, especially high levels in the essential services sector, which comprises about 80% of the British economy.
Wednesday’s figures showed that headline inflation in the UK held steady at an annual rate of 2.2% in August, still above the bank’s target.
The bank, which has cut interest rates for the first time since the outbreak of the epidemic, is expected to cut borrowing costs again at its next meeting in November, especially since it will have details of the government’s budget on Oct 30.
On Wednesday, the Fed lowered its key interest rate by half a percentage point to about 4.8% from a twelve-year high of 5.3%, where it had stood for 14 months. It also indicated that there will be more cuts to come in the next few months.
Policy doves fear that the ECB will lag behind
A major interest rate cut by the US Federal Reserve on Wednesday increased bets on further policy improvements at the European Central Bank (ECB) in October but this is still the most likely outcome given the different economic realities.
The ECB has already cut interest rates in June and earlier this month, and many at the bank have suggested further, quarterly rate cuts in advance to ensure that inflation is subdued over the long term. While the Fed’s apparent rush supports arguments that the ECB is following the curve, the underlying economy hasn’t changed overnight, so policy hawks in the Governing Council can make an argument for waiting until December.
“That the ECB needs to cut in October because of what the Fed has done is an absurd argument that will not be seen in the Governing Council,” said Dirk Schumacher, an economist at Natixis. “The only way to argue against that is to say that (the Fed’s cuts) will change the data for the euro area and that may be the case but we haven’t seen it yet.” (Reuters)
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First published: Sep 20 2024 | 1:21 AM IST