WASHINGTON/LONDON: The US Federal Reserve left its key lending rate unchanged again on Wednesday, but signaled that it could make its first cut as soon as September. After two days of deliberations, policymakers voted unanimously to maintain the US central bank’s benchmark interest rate between 5.25 percent and 5.50 percent, the Fed said in a statement — keeping rates at a 23-year high. But speaking to reporters in Washington shortly after the decision was published, Fed Chair Jerome Powell said the first interest rate cut could come "as soon as” the Fed’s next rate meeting in September if the data continue to suggest it is on track to meet its twin objectives to tackle both inflation and employment.
"The broad sense of the committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate,” he said, adding that there had been a "really significant decline in inflation.”
Meanwhile, the Bank of England on Thursday cut its main interest rate for the first time since the COVID pandemic broke out in 2020, as British inflation has retreated in recent months. In a tight 5-4 vote, BoE policymakers agreed to reduce borrowing costs by a quarter-point to 5.0 percent, the central bank announced following a regular meeting.
Governor Andrew Bailey joined four other policymakers in bringing the rate down from a 16-year high, which will ease pressure on borrowers while denting interest earned by savers. Retail banks tend to mirror the direction of BoE policy when setting their own interest rates.
"Chair Powell made clear in the press conference that the base-case for Fed officials is to begin cutting rates at the upcoming meeting in September,” Citi economists wrote in a note to clients after the decision was announced.
After a small uptick in inflation earlier this year, recent data suggest the Fed’s mission of bringing inflation back down to its long-term target of two percent is now firmly back on track. Its favored measure of headline inflation eased to an annual rate of 2.5 percent last month, while economic growth has remained resilient, and the labor market has come into better balance.
"In recent months, there has been some further progress toward the Committee’s 2 percent inflation objective,” the Fed said in its rate decision. This marks a slight change in tone from its June statement, when it noted only that "modest further progress” had been made.
"The Committee judges that the risks to achieving its employment and inflation goals continue to move into better balance,” the Fed said, adding that it was "attentive to the risks to both sides of its dual mandate.” All three major indices on Wall Street finished in the green on Wednesday following the Fed’s rate decision.
Powell told reporters that recent economic data "continue to point to kind of the direction we would want to see,” and that the Fed’s restrictive monetary policy was having an impact. "The time is coming at which it will begin to be appropriate to dial back that level of restriction,” he continued, while adding that the Fed would remain attentive to the incoming data.
Futures traders remain extremely confident that a September cut is coming, giving such a scenario a 100 percent probability, according to CME Group data. Following the BoE’s action Thursday, analysts said they expected the British central bank to cut again this year, but maybe not as early as next month. That helped the pound claw back earlier losses.
Elsewhere, the European Central Bank has started to trim rates as gains to prices of global goods and services have largely slowed in recent months. By contrast, the Bank of Japan on Wednesday hiked borrowing costs for only the second time in 17 years amid a pickup in the country’s inflation.
Britain’s rate cut comes less than one month after the country elected a new government. The centre-left Labour administration has vowed to grow the UK economy but has already warned that state spending will be hampered by tight finances. New finance minister Rachel Reeves on Monday said Britain’s state coffers faced an extra £22-billion ($28-billion) hole inherited from the previous Conservative government.
"The UK economy has been stronger in recent months and this is very welcome... but it does add to the risk that inflation could be higher” ahead. "Despite easing, services price inflation and domestic inflationary pressures do remain elevated,” he added. The BoE hiked borrowing costs 14 times between late 2021 — when they stood at a record-low 0.1 percent — and the second half of last year. Its last cut was in March 2020. — AFP