The Bank of England will have “no choice” but to up interest rates if the US central bank decides further rate increases are needed to cut inflation, experts have told i.
Jerome Powell, chair of the US Federal Reserve, on Friday warned that America may need further interest rate rises to cool high inflation.
Economists and experts said that the UK may need to follow suit if this happens, to avoid the pound weakening and inflation rising further.
Inflation in the US sits at 3.3 per cent, compared to 6.8 per cent in the UK, but Mr Powell told an annual gathering of central bankers, the Jackson Hole Symposium in Wyoming, that it “remains too high”.
He cited the ongoing effects of Russia’s invasion of Ukraine, that food and energy prices “remained volatile”, robust consumer spending and the housing market not cooling enough. This, he said, could warrant “further tightening” of monetary policy, including interest rate rises, to bring inflation down.
The Federal Reserve increased rates to 5.5 per cent in July, while they are 5.25 per cent in the UK.
The Bank of England will next adjust rates on September 21 – straight after the Fed’s federal open market committee meets on 19-20 September to discuss US rates. It comes after a panel of experts assembled by i said they would vote to increase rates to 5.5 per cent or 5.75 per cent at the Bank of England meeting, based on current data.
The US Federal Reserve has an inflation target of 2 per cent, as does the UK.
Jefferson Frank, a professor of economics at Royal Holloway, University of London, told i that if the Fed was increasing rates, “the Bank of England would not look serious if it didn’t”.
“The Bank of England likely has no choice – if interest rates in the US are higher, funds will flow from the UK and market rates will automatically go up. Further, the pound will fall substantially, raising the sterling price of imported goods and directly adding to inflation,” he said.
The interest rate of a country’s central bank generally determines how expensive borrowing is in that country.
If a country has high interest rates relative to another, this can often lead to increased foreign investment where the rates are higher, as an investor can make more money lending than they can if rates are low and this in turn can strengthen that country’s currency.
“The Fed is the dominant player in central banking, and the Bank of England largely has to follow,” Professor Frank added.
And Stephen Yiu, lead manager of Blue Whale Growth Fund, said he agreed that the Bank of England may have to follow if US rates were to rise.
“We import quite a lot of our goods in the UK and a weak sterling could mean we lose control of inflation as a result of paying for these imports,” he said.
“I would have thought the Bank would want to limit the differential between our interest rate and the US’s to reduce this risk.”
Willem Buiter, a former member of the the Bank’s monetary policy committee, which determines the base rate, said that the Fed meeting just before the Bank of England next set rates meant the timing was “right for some near-term influence.”
“If the sterling weakens as a result of a US rate hike, this will make a UK rate hike more likely,” he added, though he said he expected the Bank to up rates regardless.
“Only if the economy weakens materially more than expected and growing slack puts downward pressure on underlying inflation will we see the base rate peak at less than 6 per cent,” he said.
Interest rates are generally increased to try and counter high inflation, with the logic being that if borrowing is more expensive, people spend less, meaning demand falls, and price increases are curbed.
But rising rates also makes households’ mortgages more expensive and can risk a recession – a downturn in economic activity – because more expensive borrowing can cut investment and business growth.
Some economists have warned the Bank that it has “gone far enough” with rate rises because of this.
