Aggressive Fed moves unlikely to spur surprise Bank of England rate cut | Wilnesh News

LONDON — As traders brace for the dual impact of monetary policy decisions from the Federal Reserve and the Bank of England, economists told CNBC that a “significant” interest rate cut by the former will not prevent the latter from keeping rates on hold this week.

The market indicates that there is more than a 60% chance that the Federal Reserve will choose to cut interest rates by 50 basis points on Wednesday from the current interest rate range of 5.25% to 5.50% instead of 25 basis points. Either way, this would be the Fed’s first rate cut in the current cycle.

Meanwhile, money markets’ pricing for a rate cut by the Bank of England at its September meeting on Thursday fell to 26% on Wednesday morning from 35% on Tuesday night, still slightly higher than last week. The move comes after UK inflation was 2.2% in August, the same as in July and in line with expectations, so support for Threadneedle Street needs to be more cautious.

Although the UK’s overall interest rate has been at or near the central bank’s 2% target for five consecutive months, inflation in the services sector, which accounts for 81% of the UK economy, remains high, rising from 5.2% in August to 5.6% in July.

Falling energy prices also contributed to the overall decline, with core inflation (which excludes energy, food, alcohol and tobacco) falling at a slower pace.

Sanjay Raja, chief economist at Deutsche Bank, told CNBC that a more “powerful” interest rate cut by the Federal Reserve would not necessarily affect the Bank of England’s behavior this week, especially since the Monetary Policy Committee usually Its decision was approved around lunchtime on Wednesday. The Fed will not make an announcement until 7pm London time (2pm ET).

“However, what it could have an impact on is the MPC’s risk management considerations, including opening the door to discussion of two-way inflation/growth risks to the economy, and possibly even encouraging some on the MPC to talk about faster policy.” Given that the Fed With the approval of the Council, restrictive policies will be relaxed,” Raja said.

George Lagarias, chief economist at Forvis Mazars, told CNBC on Wednesday that in developed economies, “services sector inflation is rising and they are relying on externalities to lower overall interest rates.”

He added: “Overall inflation is falling because China is losing economic momentum faster than it wants to admit, and they are inadvertently contributing to world deflation, which is a good thing for central banks.”

Lagarias explained that this externality “means that it would be premature to cut interest rates significantly in the UK and the US”. week, even to boost sluggish economic growth.

In addition, he pointed out that cutting interest rates too quickly and too much may require central banks to raise interest rates next year, damaging their credibility and the setting of inflation expectations. Lagarias believes that the expectation of a 50 basis point interest rate cut is based on the positioning of the bond market and does not reflect the views of most strategists.

“The Fed (rate cut) may be late, but it will set the tone for the future,” he said.

The Bank of England cut interest rates by 25 basis points in August to begin monetary easing, but the Monetary Policy Committee (MPC) left market participants questioning whether they would stick with it until the last minute.

Voting members supported the cuts by a margin of five to four, while cautious members cited the labor market and services sector as major causes of concern.

Consulting firm Capital Economics said Wednesday’s consumer price index consolidated September’s unchanged interest rates and pointed to a 25 basis point cut at the next meeting in November. The report added that downward pressure on food and fuel prices was offset by higher prices for household equipment, entertainment, culture and air tickets.