How The Fed Signalled Further Global Rate Rises – and What This Means For the UK

Jun 26th 2023

On Wednesday, the US Federal Reserve announced it was pausing its interest rate rise in what would have been the 11th increase this cycle.

While this could have signalled that the fight against inflation is slowly being won, the Fed explained it was only pausing its interest rates rise to measure the impacts of its previous increases – and that it would resume its rate-hike campaign in the next few months.

“Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy,” a statement by the Federal Open Market Committee read.

With the central bank’s target range still sitting at 2007-levels at 5.25% and the Fed’s Chair Jerome Powell already contradictorily announcing further hikes expected at least in July and September, economists have predicted the Fed could increase its rates to 6% as it tries to tame its 4.1% inflation.

The Federal Reserve’s “hawkish pause” was vindicated by Powell by stating: “It seemed to us to make obvious sense to moderate our rate hikes as we got closer to our destination”.

The UK is looking towards next week’s Band of England’s rate decision to signal how far they still have to travel.

At the start of the year, UK Prime Minister Rishi Sunak said his government was aiming to halve inflation to 5% by the end of 2023. The Bank of England’s aggressive monetary tightening campaign is yet to bear fruit. In April, core inflation stood at 6.8% (its highest since 1992), with headline inflation (the consumer prices index of inflation) still sitting at 8.7%.

The UK has the second highest inflation rate in Western Europe, after Austria.

This stubbornly high inflation continuously puts pressure on the Bank of England, which is not expected to follow the Fed’s rate-hike pause. If anything, with inflation almost double that of the US, the UK is expected to tighten its policy even further.

Chancellor Jeremy Hunt has been vocal about backing base rate increases to tame inflation, even if this means sending the UK into a recession. In May, Hunt said raising interest rates was the “only path to sustainable growth”.

We anticipate the Bank of England to continue raising interest rates, in what has been the largest increase since the 1980s under Margaret Thatcher’s conservative government.

While this may negatively affect mortgages and the cost of living, further increases also mean savers could hugely benefit from the global tightening monetary campaign – so all eyes will be on the Bank of England as it announces its decision on 22 June to decide what level interest rates should be set at.