With traders bracing for the double impact of monetary policy decisions from the Federal Reserve and the Bank of England, economists came forward to share their views including that a massive interest rate cut by the Federal Reserve will not prevent the Bank of England from keeping interest rates this week.
Markets indicate a more than 60% probability that the Fed will choose to cut interest rates by 50 basis points from the usual reduction of 25 basis points on Thursday, from the current rate range of 5.25% to 5.50%. Regardless of the outcome, this will be the first rate cut by the Fed in the current cycle.
Meanwhile, money market expectations for a rate cut by the Bank of England at its September meeting on Thursday fell from 35% on Tuesday to 26% on Wednesday morning, but were still slightly higher than last week. The move comes after UK inflation remained at 2.2% for August, the same as in July and in line with expectations.
Although Britain's headline inflation rate has been at or near the central bank's 2% target for five months, inflation in the services sector which accounts for 81% of the UK economy remained high, rising to 5.6% in August from 5.2% in July.
Lower energy prices also contributed to the decline in the headline figure, with core inflation excluding energy, food, alcohol and tobacco falling at a slower pace.
Sanjay Raja, chief economist at Deutsche Bank, said that more aggressive rate cuts from the Fed would not necessarily affect the Bank of England this week, especially since the Monetary Policy Committee usually ratifies their decisions on Wednesday before the announcement on Thursday.
According to Raja, "However, it may have an impact on the MPC's risk management considerations, including opening up space for discussions on inflation/two-sided growth risks to the economy, and may strengthen some parties in the MPC to discuss a faster reduction of tight policy, after getting green light from the Fed,” .
George Lazarias, chief economist at Forvis Mazars, stated that in developed economies, "services inflation is increasing and they are relying on external factors to lower the key rate," he said.
"Headline inflation is down because China's economy is declining faster than they admit, and this is indirectly reducing inflation globally, which is good news for the central bank," he added.
Lazarias explained that these external factors "mean it is premature to cut rates aggressively," both in the UK and the US. Because of that, he expects no 50 basis point rate cut by the Fed on Wednesday, as well as the Bank of England on Thursday, even to boost weak economic growth.
Furthermore, if the rate cut is done too quickly and deeply, it may force the central bank to raise rates again next year, damaging their credibility and setting inflation expectations, he said. Lazarias believes that the expectation for a reduction of 50 basis points is more about the position of the bond market and does not reflect the view of the majority of strategists.
The Bank of England began monetary easing with a 25 basis point rate cut in August, but the Monetary Policy Committee (MPC) left market participants uncertain whether they would do so until the last minute.
Members who voted were split five to four in favor of cuts, with the more cautious citing the labor market and services as key concerns.
Consulting firm Capital Economics said that the Consumer Price Index on Wednesday confirmed a rate cut in September, while pointing to a 25 basis point cut at the next meeting in November. Downward pressure from food and fuel prices was offset by increases in household appliances, recreation, culture and air fares, he added.
