BoE Vs Fed — Evening Brief – 06.25.24

The recent decision by the Bank of England (BoE) to keep its policy Bank Rate at 5.25% suggests that the Federal Reserve’s outlook for an interest rate cut may be postponed beyond what the market is currently pricing in.

There are significant differences between the U.K. and U.S. economies, therefore comparing policy decisions may not be a valid comparison. However, it is difficult to ignore the fact that the BoE decided to keep interest rates unchanged even though inflation reached the central bank’s 2% target in May.

Furthermore, it is noteworthy that the U.K. inflation rate is far lower than the U.S. inflation rate. Extrapolating the gap suggests the Fed’s interest rate cut is not expected to happen soon, contradicting expectations of the US market.

There is still scope for discussion over the timing of the initial Fed rate cut. The current probability from Fed funds futures indicates a 66% likelihood that the first cut will occur at the September 18 FOMC meeting. The cautionary note is that market participants have consistently factored in the likelihood of rate cuts over the past year, only to be proven wrong.

The decision by the BoE certainly provides an additional justification for maintaining a cautious stance on the anticipation of earlier rather than later interest rate cuts by the Fed. Although inflation in the UK has reached its 2% objective, the central bank is still hesitant to adopt a more accommodative stance.

“It’s good news that inflation has returned to our 2% target,” noted BoE Governor Andrew Bailey. “We need to be sure that inflation will stay low and that’s why we’ve decided to hold rates at 5.25% for now.”

Will the Fed exhibit a comparable level of caution? One voting member of the FOMC is inclined to do so. Thomas Barkin, the president of the Federal Reserve Bank of Richmond, recently expressed to reporters that his “personal view is let’s get more conviction before moving.”

The argument for holding the federal funds target range steady appears more compelling for the Fed than the BoE, primarily given that U.S. inflation, which is still above 3%, based on several measures, remains higher than the Fed’s 2% target.

Recently, however, Federal Reserve Governor Adriana Kugler made slightly dovish remarks to maintain optimism about a rate cut this year. “While I remain cautiously optimistic that inflation is coming down, it is still too high, and it is moving down only slowly. I believe that policy has more work to do [but] if the economy evolves as I am expecting, it will likely become appropriate to begin easing policy sometime later this year.”