The Bank of England has kept its main interest rate on hold at 5%, despite a major cut by the US Federal Reserve. The move was largely expected due to concerns about inflation, particularly in the services sector, which accounts for 80% of the British economy. UK inflation stood at 2.2% in August, still above the bank’s target.
Divergence from the US Federal Reserve
The move to hold the rate stands in contrast to the U.S. Federal Reserve’s decision to cut its key interest rate by half a percentage point to 4.8%. The Fed’s cut is its first since the coronavirus pandemic and points to further potential cuts in the coming months. Meanwhile, the Bank of England is stressing a cautious approach, signaling it will not rush to cut rates.
Prospects for future rate cuts
Minutes from the Bank of England meeting showed eight of the nine members of the monetary policy committee voted to hold rates, with one backing a quarter-point cut. Governor Andrew Bailey signalled the need to be cautious in cutting rates, although a gradual decline could be expected if inflation is kept under control.
The next rate decision is expected in November, when the Bank will take into account the UK government’s budget announcement, scheduled for October 30. The new Labour government faces a £22 billion public finance deficit, which may lead to tax increases and spending cuts, further weighing on inflation.
The economic impact of interest rate decisions
Central banks around the world, including the Bank of England, sharply raised borrowing costs during the pandemic due to spikes in inflation. As global inflation eased, many banks, including the US Federal Reserve, began cutting rates. However, the UK’s economic outlook, shaped by fiscal changes and inflationary pressures, will guide future decisions on borrowing costs.
Experts such as Luke Bartholomew of Abrdn believe that fiscal policy changes in the upcoming budget could set the stage for faster rate cuts in the UK later in the year.
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