Bank of England Holds Interest Rate at 5% Despite Divergent US Fed Rate Cuts

Bank of England Holds Steady Amid US Fed Rate Cut

The Bank of England has maintained its main interest rate at 5%, despite a substantial cut from the U.S. Federal Reserve. This decision primarily reflects concerns surrounding UK inflation, notably within the services sector that constitutes a significant portion of the economy.

Diverging Monetary Policies

The BOE's decision contrasts sharply with the US Fed, which recently reduced its key rate to 4.8%. This marks the Fed's inaugural cut since the pandemic began, paving the way for potential reductions going forward. Meanwhile, the BOE continues a cautious strategy, refraining from hastily lowering rates.

Outlook for Future Rate Cuts

Minutes from the recent meeting indicated that eight of the nine monetary policy committee members opted to keep rates steady, with only one member favoring a minor cut. Reserve Governor Andrew Bailey underscored a reserved approach towards rate reductions but hinted at gradual cuts if inflation remains manageable.

Impacts of Fiscal Policy on Economic Decisions

The next BOE rate decision is anticipated in November, influenced by the U.K. government's budget announcement set for October 30. This budget could reveal a critical public finance gap, possibly necessitating tax hikes and spending retrenchments, which would, in turn, impact inflation.

Central banks worldwide have raised interest rates significantly during recent inflation spikes. However, as inflation shows signs of abating globally, banks, including the Fed, are beginning to cut rates. The U.K.'s economic situation, shaped by pending fiscal strategies and inflation dynamics, will invariably influence upcoming monetary policies.

Experts like Luke Bartholomew from Abrdn suggest that forthcoming fiscal policy changes could lead to a more expedited rate reduction in the U.K. by the end of the year.