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Bank of England holds interest rate at 5 per cent despite US Fed rate cut | Future UK rate outlook

The Bank of England has maintained its interest rate at 5%, contrasting with the US Federal Reserve’s rate cut to 4.8%. Inflation concerns in the UK, particularly in the services sector, have driven this cautious approach.

Edited By: Nitin Kumar @Niitz1 New Delhi Published on: September 19, 2024 18:20 IST
Bank of England London US Fed rate cut
Image Source : REUTERS/FILE PHOTO The Bank of England (BoE) building is reflected in a sign, in London, Britain.

The Bank of England has kept its main interest rate steady at 5%, despite a significant cut by the U.S. Federal Reserve. This decision was largely expected due to inflation concerns, particularly in the services sector, which represents 80% of the British economy. Inflation in the U.K. remained at 2.2% in August, still above the bank's target.

Diverging from US Federal Reserve

The decision to hold the rate contrasts with the US Federal Reserve’s move to cut its key interest rate by half a percentage point to 4.8%. The Fed’s reduction marks its first since the coronavirus pandemic and signals more potential cuts in the coming months. Meanwhile, the Bank of England emphasises a cautious approach, signalling it will not rush into rate cuts.

Outlook for future rate cuts

Minutes from the Bank of England’s meeting showed that eight of the nine monetary policy committee members voted to hold rates, with one supporting a quarter-point reduction. Governor Andrew Bailey noted the need to be cautious in reducing rates, though a gradual decrease could be expected if inflation remains under control.

The next rate decision is expected in November, when the Bank will factor in the U.K. government’s budget announcement, scheduled for October 30. The new Labour government faces a £22 billion public finance gap, which may lead to tax increases and spending cuts, further influencing inflation.

Economic impact of rate decisions

Central banks worldwide, including the Bank of England, dramatically raised borrowing costs during the pandemic due to inflation spikes. As global inflation has eased, many banks, including the US Federal Reserve, have started to reduce rates. However, the U.K.'s economic outlook, shaped by fiscal changes and inflation pressures, will guide future decisions on borrowing costs. 

Experts like Luke Bartholomew from Abrdn believe that fiscal policy changes in the upcoming budget could set the stage for more rapid rate cuts in the U.K. later in the year.

Also read | Banks crucial in driving India’s path to becoming a developed nation: Nirmala Sitharaman

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