Bumper Fed Cut Won't Prod the Bank of England, Says BNY Mellon

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The Bank of England and European Central Bank won't emulate a hefty 50 basis point interest rate cut at the Federal Reserve and will continue concentrating on their domestic issues.

This is according to analysis from Bank of New York Mellon, which warns other central banks won't simply passively follow the lead of the Fed.

In the past, central banks have followed the lead of the Federal Reserve as they look for the cover of the world's most important financial institution when enacting their own policy to minimise idiosyncratic risks.

"Under normal circumstances, its peers should be moving ahead with easing, hoping to stimulate their economies with lower rates and ensuring that their own currencies don't strengthen too much against the dollar lest exports be jeopardised," says Geoffrey Yu, an economist at BNY Mellon.

However, he says it is no longer certain that its peers will passively follow its lead.

"Last week's European Central Bank (ECB) decision is a case in point: by all accounts, the ECB’s bias is to remain restrictive, even hawkish. Frankfurt clearly has been unable to shake the notion of “hawkish cuts.” Similarly, the Bank of England is also expected to remain relatively cautious in its decision this week," says Yu.

The prediction comes ahead of Thursday's Bank of England interest rate decision, where rates are expected to be left at 5.0%. Markets are, nevertheless, expecting the next cut to come in October or November.

The odds of a 50 basis point rate cut from the Fed on Wednesday now stand at 60%, having been as low as 30% last week. This upshift in expectations follows what appears to be leaks to the media, designed to bolster expectations for a decisive start to the cutting cycle.

But, money market pricing shows expectations for the Bank of England and ECB have not followed suit, whereas they might have in the past.

"For any economy with strong trading and exposure to the US, policy synchronisation is clearly not the default option. This speaks to the view that most economies are now adjusting to supply-driven inflation and central banks are attuned to the idiosyncrasies of their own labour markets," says Yu.