Interest rates in the UK and the US were cut in November as expected; nevertheless, recent political developments on both sides of the Atlantic raised some uncertainties about the future path of monetary policy.
- The UK base rate fell to 25bp to 4.75%
- The US federal funds rate was cut by 25bp to 4.75%-5%
- The outlook for inflation looks uncertain
Interest rates in the UK and the US were cut in November as expected; nevertheless, recent political developments on both sides of the Atlantic raised some uncertainties about the future path of monetary policy.
“We don’t guess, we don’t speculate, and we don’t assume” Fed Chair Jerome Powell
The Bank of England (BoE) cut its key interest rate from 5% to 4.75% at the Monetary Policy Committee’s (MPC’s) November meeting. The members of the MPC voted by eight to one in favour of the cut, and the reduction – the second cut so far this year – was widely anticipated. BoE Governor Andrew Bailey commented: “If inflation remains low and stable, it’s likely that we will reduce interest rates further” but went on to warn: “We have to be careful not to cut interest rates too quickly or by too much.” The UK’s annualised rate of inflation subsided to 1.7% in September, falling below the BoE’s 2% target.
Looking ahead, however, the BoE warned that inflationary pressures are set to pick up, underpinned by the impact of Chancellor Rachel Reeves’ Budget; in turn, this could slow down the pace of further interest rate cuts. The MPC believes inflation in the UK will peak at 2.8% in the second half of 2025 and will not return to target until 2027.
Meanwhile, interest rates in the US were also cut in November as the Federal Open Market Committee (FOMC) voted unanimously in favour bringing down the key federal funds rate to a range of 4.5% to 5%. The reduction of 25 basis points contrasted with an aggressive 50 basis point cut at the FOMC’s September meeting, which was also its first cut in over four years. The rate of consumer price inflation in the US moderated to 2.4% year on year in September, representing its smallest 12-month increase since February 2021.
US equity markets hit record highs following the election of Donald Trump as President, and the US dollar rose against the pound. However, the news sparked some uncertainties about the outlook for US inflation, leading to concerns that President-elect Trump’s planned tariffs could hamper the central bank’s future scope to cut interest rates. Nevertheless, Federal Reserve Chair Jerome Powell commented: “We don’t know what the timing and substance of any policy changes will be … We don’t guess, we don’t speculate, and we don’t assume.”
