Big US interest rate cut in the balance, with UK set to hold

Financial market participants are increasingly of the opinion the US central bank will impose a bigger than expected interest rate cut this week, with the Bank of England holding off on a fresh reduction.

At the start of a major week for central bank announcements and economic data, the focus of attention is firmly on the United States as the Federal Reserve prepares for its first rate cut since early 2020.

It has been held at its 5.25%-5.5% target range since July last year, but will be reduced when the Federal Open Market Committee concludes its latest policy meeting on Wednesday.

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That is as far as has been guided by Fed chair Jay Powell.

The recent weakening in the US economy, which has sparked fears of a recession, means financial market opinion is now split on whether a quarter point cut or half point reduction is coming.

There is no such gulf in expectations looking ahead to the Bank of England’s rate decision on Thursday.

Economists and markets agree there will be no further shift downwards in Bank rate at the conclusion of its meeting, following on from the quarter point reduction in August.

While recent data has also suggested a weakening in economic output, the pace of wage growth remains a concern for UK policymakers.

New inflation data due on Wednesday is also tipped to show a quickening in the pace of so-called core inflation – a measure that strips out volatile elements such as food and energy prices.

A Reuters poll of economists sees the headline rate of consumer prices inflation for the year to August coming in at 2.2%.

That is flat on the previous month.

Financial market expectations see only a 30% chance of a second rate cut being imposed by the Bank.

In the US, a 0.5 percentage point hike is seen as more likely than not.

That prompted some weakness in the dollar in early trading on Monday. The US currency was more than a third of a cent lower versus the pound at $1.31.

Oil prices, which also tend to spike on US interest rate cut expectations, were also on the rise.

JPMorgan economist Michael Feroli said: “We agree it is likely to be a close call, but we also believe the Fed will make the ‘right’ move and go 50bp [basis points].

“The case for a 50bp cut seems clear to us: various iterations of a Taylor Rule imply policy is currently a full percentage point or more too restrictive,” he added.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said of the day’s market moves: “Investors remain split about the size of the Fed rate cut, which the policymakers are expected to deliver.”

“More bets are being put on the likelihood that there may be 50bps reduction announced, which has pushed down the dollar slightly, in an extension of its recent losses,” she added.

“Even if a smaller rate cut is delivered, it’ll raise expectations for a more aggressive loosening of policy in November and December, with 100bps of rate reductions by the end of the year priced in by markets.

“We are set to see the start of an eager easing cycle, given that inflation is heading towards target and demand is being squeezed out of the economy. A quick succession of cuts is expected, to try stop the slowing US economy going into reverse.”