- Central banks likely to lower borrowing costs
- US Federal Reserve cut rates by 0.5%
- UK may follow US interest rate policy
Central banks worldwide are examining the cost of borrowing, with the majority planning to lower interest rates. On Thursday, the Bank of England will review whether the UK economy is prepared for another rate decrease.
US interest rates have been cut for the first time in more than four years, and by more than many predicted, on fears that the world’s most excellent economy is slowing.
The US Federal Reserve cut interest rates by 0.5 points to 4.75% to 5%.
In contrast to the UK, the US interest rate is a range rather than a single percentage point used to inform lenders.
The Fed’s principal goal is to reduce inflation to 2%, and it has used interest rates to drive money out of the economy by making borrowing more expensive since 2022, when the Ukraine/Russia price shock occurred.
Recent numbers suggest that the Fed is close to meeting its inflation target. The primary indicator reached 2.5% in August, the lowest rate in three years.
However, symptoms of a faltering economy emerged last month, as data on job creation fueled recession worries.
The Fed indicated in its statement that, while it remained optimistic about both inflation and growth prospects, a slowdown in hiring was cause for concern.
Only one member of the rate-setting committee opposed the 0.5 percentage point drop. Financial market participants were split on whether to go with the 0.25 option instead.
Following the announcement, US stocks soared, with the Dow Jones Industrial Average and the broader S&P 500 up more than 0.5% from their flat positions seconds before the rate decision was announced.
The dollar was trading a penny lower against sterling at $1.32.
Some market analysts claimed the Fed’s move demonstrated that Fed Chair Jay Powell and his fellow policymakers had been too hesitant to respond to the employment downturn.
He told reporters, “We’re going to make decisions meeting by meeting, based on the incoming data and the evolving outlook, the balance of risks… it’s a process of recalibrating our policy stance away from where we were a year ago, when inflation was high, and unemployment was low, to a more appropriate place given where we are now and where we expect to be.”
“That process will take time,” he added, noting that there would be no “rush.”
Michael Sheehan, fund manager of fixed income at EdenTree Investment Management, stated, “Kicking off this cutting cycle with a 50 basis point reduction will undoubtedly vindicate those who argued that the Fed had fallen behind the curve.”
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Fear that this cutting cycle would be any less drastic than prior ones has been thoroughly dispelled.
We expect the more significant 50 basis point drop to support risk assets in the short run. The main question for markets and the Federal Reserve will be how far the labor market downturn can continue.
Powell hoped that taking firm action early would help to limit a significant weakening and achieve the coveted gentle landing.
What about the UK?
It comes as the UK’s central Bank, the Bank of England, meets on Thursday to make its own interest rate decision.
While the Bank will focus on UK economic data and was expected to keep rates on Wednesday afternoon, it may be swayed by US policy decisions.
Lower interest rates weaken currencies; thus. Thus, a significant cut by the Fed could benefit the pound.
While buying more dollars benefits those vacationing in the United States and paying for imports such as oil, it is detrimental to exporters, who receive less for their goods and have a less competitive product.
Lower exports can lower inflation, making the Bank more inclined to cut.
