- Chairman Jerome Powell has hinted at a cut
- Central banks are attempting to relieve the burden for lenders
- Borrowing costs were increased to battle surging inflation
The US central bank is poised to slash interest rates this week but UK policymakers are expected to be more wary.
The Federal Reserve is tipped to make a cut on Wednesday – the first time since 2020.
Chairman Jerome Powell has hinted at a cut as central banks attempt to relieve the burden for lenders. Borrowing costs were increased to battle surging inflation, which peaked in the US at 9.1 per cent two years ago.
Data last week showed consumer price inflation fell from 2.9 per cent in July to 2.5 per cent in August, beating predictions that it would reach 2.6 per cent. It was last lower in February 2021.
But economists believe the bank will be cautious, fearing that a dramatic reduction could risk inflation accelerating again. There are mixed predictions about whether it will opt for a 0.25 per cent or 0.50 per cent cut.
Downward trend: Chairman Jerome Powell has hinted at an interest rate cut as central banks attempt to relieve the burden for lenders
The Bank of England’s next rate-setting meeting takes place after the Fed on Thursday. The Monetary Policy Committee (MPC) is expected to opt for no change, having announced a cut last month
Analysts at Barclays say they expect the Bank to hold rates at 5 per cent and ‘the tone of the minutes to remain cautious, while acknowledging further progress towards inflation returning sustainably to target’.
They have predicted a cut in November, December and February, then again in May and August, with the rate reaching 3.75 per cent in August 2025.
Matthew Ryan, at global financial services firm Ebury, said: ‘While MPC members will no doubt be encouraged by the recent progress on inflation, we suspect that the bank would need to see a further cooling in the labour market, particularly a continued easing in wage pressures, for them to commit to an aggressive pace of cuts.
‘The statement may nod at the likelihood of a November rate reduction, although we think that it will keep the line that rates will not be cut ‘too quickly or by too much’.’
UK inflation data for August is also expected on Wednesday. Headline inflation – consumer prices index (CPI) – rose by 2.2 per cent in the year to July – higher than the 2 per cent recorded in June, which is the Bank’s target level.
Inflation hit 11.1 per cent in October 2022, the highest for 40 years.
DIY INVESTING PLATFORMS
Affiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.