The Bank of England has kept its main interest rate steady at 5%, despite a significant cut by the U.S. Federal Reserve. This decision was largely expected due to inflation concerns, particularly in the services sector, which represents 80% of the British economy. Inflation in the U.K. remained at 2.2% in August, still above the bank's target.
Diverging from US Federal Reserve
The decision to hold the rate contrasts with the US Federal Reserve’s move to cut its key interest rate by half a percentage point to 4.8%. The Fed’s reduction marks its first since the coronavirus pandemic and signals more potential cuts in the coming months. Meanwhile, the Bank of England emphasises a cautious approach, signalling it will not rush into rate cuts.
Outlook for future rate cuts
Minutes from the Bank of England’s meeting showed that eight of the nine monetary policy committee members voted to hold rates, with one supporting a quarter-point reduction. Governor Andrew Bailey noted the need to be cautious in reducing rates, though a gradual decrease could be expected if inflation remains under control.
The next rate decision is expected in November, when the Bank will factor in the U.K. government’s budget announcement, scheduled for October 30. The new Labour government faces a £22 billion public finance gap, which may lead to tax increases and spending cuts, further influencing inflation.
Economic impact of rate decisions
Central banks worldwide, including the Bank of England, dramatically raised borrowing costs during the pandemic due to inflation spikes. As global inflation has eased, many banks, including the US Federal Reserve, have started to reduce rates. However, the U.K.'s economic outlook, shaped by fiscal changes and inflation pressures, will guide future decisions on borrowing costs.
Experts like Luke Bartholomew from Abrdn believe that fiscal policy changes in the upcoming budget could set the stage for more rapid rate cuts in the U.K. later in the year.
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