Cuts and Pushbacks
Yesterday the Bank of England delivered a hawkish cut of 25bps to 4.75%, in an 8-1 vote, the outlier preferred to hold at 5%. The central bank reiterated that “a gradual approach to removing policy restraint remains appropriate.” Bank Governor Andrew Bailey also noted rates were likely “continue to fall” but that they could not be cut “too quickly or by too much.”
The BoE warned that the measures announced in Autumn Budget 2024 expected to boost the level of GDP and CPI inflation. The bank now sees inflation rising by 0.5%, more than previously forecast, to hit a high of around 2.75% next year before falling back to its 2% target. Growth, meanwhile, should rise 0.75% in a year’s time. Sterling enjoyed a ~1% rise following the announcement; the weaker dollar did help the pound’s ascent.
Across the pond, we later heard from the FOMC who cut rates by 25bps. The unanimous vote to ease rates to a range of 4.50-4.75% was widely expected. The Committee struck a balanced tone, stating “The economic outlook is uncertain, and the committee is attentive to the risks to both sides of its dual mandate.”
Inflation has progressed towards the Fed's 2% target, though notably absent was earlier language about needing "greater confidence" in this trend. Labour market conditions have eased, with unemployment edging up, whilst remaining at historically low levels. Chair Powell noted labour conditions are now “less tight” than pre-pandemic levels.
Powell described the latest rate cut as a “further recalibration” and warned of dual risks: aggressive cuts could threaten inflation progress, whilst excessive caution risks dampening economic activity unnecessarily. He emphasised the Fed remains uncommitted to any preset course, though this flexibility may face heightened scrutiny given Trump's history of criticism.
That relationship is likely to be tested. Powell has already insisted that he would not resign even if president-elect Trump demanded it, stating that election results have no role in policy decision-making.
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