The Bank of England clears the way for Britain to cut interest rates before the US
Bank of England Governor Andrew Bailey yesterday gave his strongest hint yet that Britain could start cutting interest rates before the US.
Bailey said progress in the fight against inflation could mean cutting rates further than markets currently expect.
That could mean that both Britain and the eurozone are questioning assumptions that the US Federal Reserve should take the lead in lowering borrowing costs.
“There is no law that says the Fed has to act first and everyone else, including us, has to act second,” Bailey said.
The Bank of England yesterday left interest rates unchanged at 5.25 percent, but hinted at a cut this summer – possibly next month – amid signs that inflation is close to its 2 percent target.
Cooling of inflation: the Bank of England left interest rates unchanged at 5.25% yesterday, but strongly hinted at a cut this summer – possibly as early as next month
Bailey said: ‘With the progress we have made… it is likely that we will have to cut bank rates over the coming quarters, possibly more than what is currently priced into the markets.’
He added that the Bank would look closely at new inflation and labor market data in assessing whether “the risks of inflation persistence are waning.” Bailey said a move in June was “neither ruled out nor a fait accompli.”
British inflation fell to 3.2 percent in March, while it stood at 2.4 percent in the eurozone. It is widely expected that the European Central Bank will cut interest rates next month.
Inflation has proven more persistent in America, the world’s largest economy, where it rose to 3.5 percent.
Central banks outside the US are often thought to be wary of looser interest rates than the Fed, as that usually means their currencies weaken against the dollar, resulting in higher import prices.
That has led to market expectations that UK interest rates will be influenced by those in America.
But Bailey said: ‘In my view, inflation dynamics in Britain are different to those in the US. The US is facing a different situation.”
The governor’s comments initially caused the pound to fall against the dollar to almost $1.24 and pushed the FTSE 100 to a new high.
However, the currency movement later reversed and the London index gave up much of its gains.
That came after renewed signs of weakness in the U.S. labor market, with figures showing a higher-than-expected increase in weekly jobless claims.
It follows data from last week that showed weak job growth in the US. The Fed has indicated that while persistent inflation will keep rates higher for longer, an unexpected shock to the labor market could change its stance.
Economist James Smith of ING Bank said: ‘The Bank of England is getting very close to its first rate cut.
‘We are still leaning more towards an August start date for the cuts, even if that is a close call. What is not in doubt is that the Bank has no problem getting ahead of the Fed.”
The Bank of England’s nine-member monetary policy committee (MPC) voted 7-2 yesterday to leave interest rates unchanged.
Swati Dhingra and Dave Ramsden voted in favor of a rate cut, the first time since early 2020 that two or more members of the MPC have voted in favor of a rate cut.