Bank of England Governor Andrew Bailey yesterday gave the clearest indication yet that Britain could start cutting interest rates before the United States.
Bailey said progress in the battle against inflation may mean rates need to be cut further than markets currently expect.
That could mean the UK, as well as the eurozone, challenges assumptions that the US Federal Reserve should lead the way in reducing borrowing costs.
“There is no law that says the Fed has to act first and everyone else, including us, has to act later,” Bailey said.
The Bank of England left interest rates unchanged at 5.25 percent yesterday but hinted at a cut this summer – possibly next month – amid signs that inflation is close to reaching its 2 percent target. .
Cooling inflation: The Bank of England yesterday left interest rates unchanged at 5.25%, but clearly hinted at a cut this summer, possibly next month.
Bailey said: “With the progress we have made… we are likely to have to reduce the Bank’s rate in the coming quarters, possibly by more than markets are currently pricing in.”
He added that the Bank would closely examine new inflation and labor market data as it assesses whether “the risks of persistent inflation are diminishing.” Bailey said a move in June “was neither off the table nor a fait accompli.”
UK inflation fell to 3.2 percent in March, while in the eurozone it is 2.4 percent and the European Central Bank is widely expected to cut rates next month.
Inflation has proven most persistent in the United States, the world’s largest economy, where it rose to 3.5 percent.
Central banks outside the United States are often assumed to be cautious about being more dovish on rates than the Federal Reserve because that tends to mean their currencies weaken against the dollar, resulting in higher import prices. Taller.
This has led to market expectations for UK rates being influenced by those in the US.
But Bailey said: ‘In my view, the dynamics of inflation in the UK are different to those in the US. “The United States faces a different situation.”
The Governor’s comments initially caused the pound to fall against the dollar to around $1.24 and pushed the FTSE 100 to a new high.
However, the currency move later reversed and the London index gave up much of its gains.
This came after renewed signs of weakness in the US labor market, with figures showing a larger-than-expected rise in weekly claims for unemployment benefits.
This follows last week’s data showing weak gains in US employment. The Federal Reserve has signaled that while persistent inflation will mean rates will stay high longer, an unexpected shock to the labor market could change its view.
ING Bank economist James Smith said: ‘The Bank of England is getting very close to its first rate cut.
‘We are still more inclined towards a start date for the cuts in August, although it is close. What there is no doubt is that the Bank feels comfortable getting ahead of the Federal Reserve.’
The Bank of England’s nine-member Monetary Policy Committee (MPC) voted 7 to 2 yesterday in favor of leaving interest rates unchanged.
Swati Dhingra and Dave Ramsden voted for a cut, the first time two or more MPC members have voted for a rate cut since early 2020.