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The Bank (Base) Rate, which, on Thursday, the Bank of England kept at 4.50%, following the previous day’s do-nothing from the Federal Reserve.
On Wednesday, as expected, the US Federal Reserve chose to hold its interest rate at 4.25%-4.50%, having cut it by 1% since September 2024. The Fed’s statement made no reference to the market volatility created by Donald Trump’s on-again-off-again tariffs, beyond a slight tweak to the wording to say, “Uncertainty around the economic outlook has increased.”
However, in the press conference after the announcement, Jay Powell, the Fed Chairman made clear that tariffs were the primary reason for the greater uncertainty. That was reflected in the dot plot, which had more of a spread of estimates than its December version, even if the median figures were virtually unchanged – the implicit consensus is for two rate cuts in 2025, although four Fed members see no change this year.
At the Bank of England, its statement was more political than the Fed’s, even if the no change decision was the same:
“Since the MPC’s previous meeting, global trade policy uncertainty has intensified, and the United States has made a range of tariff announcements, to which some governments have responded. Other geopolitical uncertainties have also increased and indicators of financial market volatility have risen globally. The German government has announced plans for significant reform to its fiscal rules.”
The Bank, like the Fed, remains cautious:
The Bank says that based on its “evolving view of the medium-term outlook for inflation, a gradual and careful approach to the further withdrawal of monetary policy restraint is appropriate”.
The Bank repeated its forecast that it expects inflation to reach 3.75% in Q3 2025, before falling back thereafter.
In classic central banker balance-speak, it notes “Should there be greater or longer-lasting weakness in demand relative to supply, this could push down on inflationary pressures, warranting a less restrictive path of Bank Rate. Should there be more constrained supply relative to demand and more persistence in domestic wages and prices, including from second-round effects related to the near-term increase in CPI inflation, this would warrant a relatively tighter monetary policy path.” The reference to wage inflation comes on a day when the Office for National Statistics (ONS) reported earnings (excluding bonuses) rising by 5.9%.
The vote was 8-1 in favour of holding the rate at 4.5%. Catherine Mann, who voted for a 0.5% cut last month was this time in the no change camp. The one vote against was from an external Monetary Policy Committee member, who favoured for a 0.25% cut.
Comment
Both central banks are having to deal with uncertainty, much of it from the same source. Until the picture is clearer, they may continue to prefer to hold rates.
Source: Techlink Professional
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