Federal Reserve slows pace of inflation rate hikes again but warns of more action ahead
The US central bank has slowed the pace of interest rate hikes further but indicated more rises are likely despite official figures suggesting price pressures have peaked in the world’s largest economy.
The Federal Reserve revealed its verdict hours before counterparts in the UK and Europe made their next moves in the battle against inflation – with both the Bank of England and European Central Bank set to raise borrowing costs further.
The Fed, as it’s known, raised its target interest rate by a quarter of a percentage point – as financial markets expected – following an aggressive set of increases last year to tame decades-high inflation.
It was lifted to a range between 4.50% to 4.75%.
The statement from the Fed confirmed that policymakers planned to maintain an iron grip on inflation risks through further hikes.
“The committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time,” it read.
Fed chairman Jay Powell later told a news conference that history told him it would be dangerous to take the foot off the gas “prematurely”.
His language was seen as hawkish in the face of the smallest rise in the target rate since last March though markets, which were initially spooked, took some comfort when Mr Powell confirmed its next moves would be determined by the data.
He also confirmed Fed expectations that the US economy would grow this year.
March 2022 was when the Fed made its first move against surging US inflation as post-pandemic price rises were exacerbated around the world by the war in Ukraine.
The Fed had imposed four consecutive hikes of 0.75 percentage points prior to its last meeting in December, when the pace was reduced to a half percentage point rise.
It was at that point, before Christmas, when inflationary pressures were truly seen by policymakers as easing from the four-decade highs seen earlier in 2022 because so-called core inflation had slowed.
Global wheat costs were among those to surge after Russia’s invasion of Ukraine
The cost of things such as oil, gas and many other commodities – outside of central bank control – went through the roof.
These increases later became ingrained in prices across Western economies as costs were passed down supply chains, pressuring central banks to cool economic activity and discourage wage increases that could inflame the inflation problem.
While economists believe inflation has also peaked in the UK and across Europe, the continent’s exposure to the loss of Russian energy flows has inflation more stubborn.
The Bank of England’s next rate decision is revealed at midday on Thursday
The Bank of England is widely expected to lift its rate from 3.5% to 4% on Thursday as a result.
The European Central Bank, which sets the rate path for the 20 countries which use the euro, is expected to impose the same hike in its main deposit rate.
The pound and euro both lost around a third of a cent as the dollar strengthened in the immediate aftermath of the Fed’s decision but both later recovered.
Oil prices, however, were down by 3% as the prospect of more rate tightening was seen as damaging for demand. Brent crude was trading at $83 a barrel.
Richard Carter, head of fixed interest research at Quilter Cheviot, said of the quarter point rate rise: “Investors should not confuse this as the end of the rate hiking cycle, instead a pause for breath as the Federal Reserve looks to continue to fight inflation, while also assessing if further hikes are the way to go.
“The economy has been fairly resilient and the consumer remains in okay shape. Recession could be avoided as a result, but this means we need to prepare for the Fed to continue raising rates for as long as inflation remains elevated.
“The last thing it wants to do is take its foot off the gas too early and stoke a new inflationary cycle,” he wrote.
Santander is to buy TSB, becoming the UK’s third biggest bank in the process.
Once completed, the combined bank will have the third-largest number of personal account balances in the UK, and be fourth in terms of mortgage lending, with a total of nearly 28 million customers, Santander said.
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The deal is still subject to approval by regulators and shareholders of TSB’s parent company, Banco Sabadell, but is expected to conclude in the first three months of 2026.
It could mean the TSB brand is no longer visible on the high street, as Santander said it “intends to integrate TSB in the Santander UK group”.
Job losses may also result.
Santander‘s interest in tabling a bid for TSB was first reported by Sky News.
TSB has five million customers, offers business and personal accounts, and is the UK’s tenth largest lender for mortgages and deposits. After cutting jobs and branches last year, it currently employs roughly 5,000 staff and operates 175 branches, the seventh largest network in the UK.
It comes just months after speculation that Santander would leave the UK market, despite denials from the Spanish-owned lender.
File pic: iStock
In recent months, it had rejected takeover attempts from rivals NatWest and Barclays.
Barclays had also bid for TSB.
Banco Sabadell said it was selling TSB “to focus our strategy on Spain”, its chief executive, Cesar Gonzalez-Bueno, said.
Santander has agreed to pay an initial £2.65bn for TSB, with the final price expected to rise to £2.9bn when yet-to-be-announced financial results are factored in.
The price is 1.5 times the value of TSB’s assets.
“This is an excellent deal for customers, combining two strong and complementary banks, creating one of the most substantial banks in the UK and materially enhancing the competitiveness of the industry,” said Mike Regnier, CEO of Santander UK.
A major component within household energy bills is set to rise sharply from next year to help pay for efforts to maintain energy security during the transition to green power.
The industry regulator Ofgem’s draft determination on how much it will allow network operators to charge energy suppliers from 1 April 2026 to 31 March 2031 would push up network costs within household bills by £24 a year.
These charges currently account for 22% of the total bill.
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The findings, which will be subject to consultation before a final determination by the end of the year, reflect demands on network operators to make power and gas networks fit for the future amid expansion in renewable and nuclear energy to meet net zero ambitions.
Ofgem says the plans it has given provisional approval for amount to a £24bn investment programme over the five-year term – a four-fold increase on current levels.
A total of 80 major projects includes upgrades to more than 2,700 miles of overhead power lines.
If rubber stamped as planned, the resulting network cost increases threaten further upwards pressure on bills from next April – a month that has now become synonymous with rising essential bills.
The watchdog revealed its plans as the 22 million British households on the energy price cap benefit from the first decline for a year.
It is coming down from an annual average £1,849 between April and June to £1,720 from July to September.
That’s on the back of easing wholesale costs seen during the spring – before the temporary surge in wholesale gas prices caused by the recent instability in the Middle East.
A new forecast released by industry specialist Cornwall Insight suggested households were on track to see a further, but slight, decline when the cap is adjusted again in October.
At the current level it is 28% lower than at the height of the energy-led cost of living crisis – but 10% higher than the same period last year.
The price cap does not limit total bills because householders still pay for the amount of energy they consume.
Ofgem is continuing to recommend consumers shop around for fixed rate deals in the market as they can offer savings compared with the price cap and shield homes from any price shocks seen within their fixed terms.
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Jonathan Brearley, the regulator’s chief executive, said: ”Britain’s reliance on imported gas has left us at the mercy of volatile international gas prices which during the energy crisis would have caused bills to rise as high as £4,000 for an average household without government support.
“Even today the price cap can move up or down by hundreds of pounds with little we can do about it.
“This record investment will deliver a homegrown energy system that is better for Britain and better for customers. It will ensure the system has greater resilience against shocks from volatile gas prices we don’t control.
“These 80 projects are a long-term insurance policy against threats to Britain’s energy security and the instability of prices. By bringing online dozens of homegrown, renewable generation sites and modernising our energy system to the one we will need in the future we can boost growth and give ourselves more control over prices too.
“Doing nothing is not an option and will cost consumers more – this is critical national infrastructure. The sooner we build the network we need, and invest to strengthen our resilience, the lower the cost for bill payers will be in the future.”
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