Monetary authorities in the U.S. reduce prime lending rates for the first time over a four-year span
US Interest Rate Cut and Its Impact on UK Interest Rates and Markets
The US Federal Reserve has made a significant move by cutting interest rates for the first time in more than four years, with the federal funds rate now at a range of 4.75 to 5%. This decision follows a similar trend by other central banks, including those in Europe and Canada.
The potential impact of US interest rate cuts on UK interest rates and markets is significant but indirect. US rate changes influence global financial conditions, investor sentiment, and currency markets, which in turn affect the UK's economic environment and the Bank of England's rate decisions.
The Bank of England (BoE) has already been cutting UK interest rates gradually since August 2024, lowering the Bank Rate to 4% by August 2025, reflecting easing inflation and a cautious outlook on the UK's economic growth and labor market conditions. However, UK rate cuts so far have had limited positive impact on the UK economy partly due to global developments, implying that external influences such as US monetary policy also play a damping role.
If the US aggressively cuts rates, it could put downward pressure on UK yields as well, possibly prompting the BoE to ease rates further to maintain economic stability and competitiveness. Conversely, if US rates remain high or volatile, the BoE may proceed cautiously. The BoE explicitly monitors international developments when setting UK interest rates, indicating US monetary policy is one of the factors influencing the timing and magnitude of UK rate changes.
The BoE's approach remains gradual and data-dependent, balancing UK-specific factors against evolving international monetary conditions, including US policy. This cautious approach was evident in the MPC's August policy summary, where it stated that monetary policy will need to remain restrictive for a while.
The US rate cut has immediate implications for the financial markets. US stocks rallied immediately after the announcement, while the FTSE 100 opened higher in London on Thursday morning. Markets are pricing in one to two more cuts before the end of the year, with November looking like the most likely month.
Gabriel McKeown, head of macroeconomics at Sad Rabbit Investments, suggests that the US rate cut could lead to a new bull market in risk assets. Isaac Stell, investment manager at Wealth Club, stated that the Fed has opted for a jumbo option in cutting interest rates. However, Swati Dhingra was the only committee member who voted to reduce the base rate to 4.75%, indicating some dissent within the Fed.
The BoE's next meeting will not take place until November, giving the markets time to digest the implications of the US rate cut and assess its impact on the UK economy. The BoE's decision will depend not only on domestic economic conditions but also on the evolving international monetary landscape, particularly US policy.
