As the Fed drags its feet, the Bank of England finally cuts rates
The Bank of England (BOE) has become the latest central bank to cut interest rates.
In a narrow vote, U.K. central bankers voted 5 to 4 to lower interest rates by a quarter point to 5%, marking the first rate cut since early 2020 when Covid swept the globe.
The split vote highlighted the anxiety some policymakers felt about cutting interest rates even as inflation returned to the central bank’s 2% target.
According to the Office for National Statistics, the Consumer Price Index (CPI) increased 2% annually in June, unchanged from the previous month.
However, stubborn service inflation continue to pose a problem, rising 5.7% year over year.
Nevertheless, BOE Governor Andrew Baily described the decision to cut rates as “finely balanced” without committing to further reductions.
“I’m not giving you any view on the path of rates to come—I’m saying we will go from meeting to meeting, as we always do,” Bailey told reporters following the BOE’s policy announcement.
“We’ve become sufficiently confident now that we think we can reduce that degree of restrictiveness a bit, and we will go on making that judgment.”
The BOE joins the European Central Bank, the Bank of Canada, and other central banks that cut rates this year. This list doesn’t include the Fed, which voted yesterday to keep rates on hold.
The BOE diverges from the Fed
Bloomberg economists Ana Andrade and Dan Hanson described the BOE’s latest decision as a “cautious rate cut,” but it was a rate cut nonetheless.
The same can’t be said for the Fed, which is now expected to be among the last of the major central banks to begin lowering rates.
Like their U.K. counterparts, Fed policymakers are worried that cutting rates too soon could undo years of progress on inflation. Following their two-day policy meeting on Aug. 1, U.S. central bankers described cost pressures as “somewhat elevated.”
Reading between the lines, however, the Fed seems to be prepping the market for a September rate reduction. But that all depends on whether inflation continues to moderate.
Curiously, U.S. headline inflation is one full percentage point higher than the U.K.’s.
BOE cuts will have little effect on the global economy
Although the BOE’s policies are important, the Fed is the real mover of international markets.
The Fed controls the size and growth rate of the U.S. dollar, making it “the most important factor in the governance of the international financial system,” according to Steven Vass, business and economy editor at The Conversation.
The Fed’s actions directly impact how major financial institutions access liquidity. These institutions decide how to allocate trillions of dollars among their clients, which range from sovereign nations to individual households.
According to CME Group’s FedWatch Tool, Wall Street thinks it's virtually guaranteed that the Fed will lower rates at its upcoming meeting on Sept. 17-18.