The Bank of England has left its key interest rate unchanged at 5% despite a major cut by the US Federal Reserve, the first cut since the start of the coronavirus pandemic more than four years ago.
Thursday’s decision was widely expected amid ongoing concerns about inflation within the bank’s monetary policy committee, particularly high levels in the crucial services sector, which accounts for about 80% of the UK economy.
Figures on Wednesday showed that UK inflation held steady at an annual rate of 2.2% in August, still above the bank’s target.
The bank, which cut interest rates last month for the first time since the pandemic began, is expected to cut borrowing costs again at its next meeting in November, especially as details of the government’s budget are presented on Oct. 30.
On Wednesday, the Fed cut its key interest rate by half a percentage point to around 4.8%, from a two-decade high of 5.3%, where it had stood for 14 months. It also signaled that more cuts would come in the months ahead.
Policy doves fear ECB is falling behind
A major rate cut by the US Federal Reserve on Wednesday raised expectations of further policy easing by the European Central Bank (ECB) in October. However, given the changing economic reality, this is still not the most likely outcome.
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 to ensure inflation is beaten on a sustainable basis. While the Fed’s apparent haste lends some support to arguments that the ECB is lagging behind, economic fundamentals haven’t changed overnight, so policymakers at the Governing Council could make an argument for waiting until December.
“That the ECB has to cut in October because of what the Fed has done is a ridiculous argument that would not be accepted by the Governing Council,” said Dirk Schumacher, an economist at Natixis. “The only way to argue for that is to say that it (the Fed cut) will change the eurozone data and that may be the case, but we haven’t seen it yet.” (Reuters)
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First publication: Sep 20, 2024 | 01:21 AM IST