Bank of England rate cut expected as Federal Reserve holds again

The Bank of England will implement its first interest rate cut since 2020 at midday on Thursday, if financial markets and many economists are right, hours after the US central bank signalled it could act next month.

The Federal Reserve held its benchmark rate in the 5.25%-5.50% range on Wednesday evening but downgraded its view on inflation to just “somewhat elevated” and hailed “further progress” in the right direction.

The message was exactly what had been expected and was seen as opening the door to a cut at the next meeting, which ends on 18 September.

Fed chair Jay Powell told reporters it was possible so long as the data continued to move in the right direction.

Money latest: Major banks cut rates ahead of BoE announcement

The Fed announcement cleared the way for the Bank of England to take centre stage the following day.

This interest rate decision was seen as more finely balanced but likely by a majority of economists polled by the Reuters news agency in advance.

There was a 65% expectation of a reduction from 5.25% to 5%, according to market expectations reported by LSEG.

But many commentators added that a lack of guidance from the Bank meant a rate cut was far from nailed on.

That has been partly blamed on the recent UK election – with the members of the Bank’s monetary policy committee anxious to preserve its independence.

A rate cut would be a hugely welcome step for millions of borrowers, such as mortgage holders, who have felt the impact since the Bank began its battle against inflation in December 2021.

The UK was the first major western economy to react to the pick up in the pace of price growth, which began after the COVID pandemic ebbed away.

Inflation peaked however in the wake of Russia’s invasion of Ukraine, when energy and many key commodity costs hit unprecedented levels.

It created the squeeze on living standards that became widely known as the cost of living crisis – a squeeze that has been evolving ever since.

There were 14 consecutive interest rate increases imposed by the Bank to choke demand in the UK economy but it has held the rate since the final hike was implemented in August last year.

Since then elements of inflation, such as for services, have proved sticky and the Bank has also consistently warned that the pace of wage growth was too high to allow for a rate cut.

It will reveal at midday on Thursday not just its latest interest rate decision but also the quarterly monetary policy report which will contain the Bank staff’s latest projections on inflation, economic growth and employment.

The Federal Reserve’s rate decision and accompanying statement did little to shift financial markets initially as the core message was largely priced in, analysts said.

Shares on Wall Street rise

However, US stocks later found forward momentum with the tech-focused Nasdaq rising 3%. The broader S&P 500 was almost 2% higher.

The dollar lost some marginal ground, as would be expected due to the fact the prospect of lower interest rates tends to weaken a domestic currency.

For its part, the Bank of England will likely signal a very cautious path for interest rate cuts ahead, should the nine-member rate-setting committee back a reduction through a majority vote.

Expectations for a rate cut, which have existed all year, have prompted lenders to adjust their own rates according to the latest speculation.

A major element of the continuing cost of living crisis currently is the additional pain borrowers are facing due to the Bank’s inflation medicine.

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Mortgage holders, for example, have faced paying hundreds of pounds extra per month when having to start new fixed-rate deals while landlords have been passing on their own hikes in borrowing costs to tenants.

Record highs for rents have been exacerbated by a lack of available stock.

Commenting on the outlook Matt Smith, Rightmove’s mortgage expert, said: “If the Bank Rate is cut, it will be really positive news and hopefully more will follow as the economy continues to stabilise.

“If it isn’t, people shouldn’t be too concerned – as it is highly likely it would follow in September, and I’d expect mortgage rates to hold steady and perhaps even trickle down a bit – albeit not quite as fast as if there is a cut.”