US rate cut will not be matched by Bank of England
The US central bank has announced an interest rate cut, just hours before the Bank of England is tipped to refrain from following suit.
The Federal Reserve cut its main funding rate by a quarter point to a new target range of 4.25%-4.5%, as markets had expected, but signalled that future reductions would happen more slowly.
A resurgence in the pace of inflation is a big worry, with the prospect of new trade tariffs under Donald Trump from 20 January also risking a leap in the pace of US price growth in the New Year as imported goods would cost more.
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Data on Tuesday showed resilient consumer spending among other reasons for Fed policymakers to be wary of inflation ahead.
The Federal Open Markets Committee expected two rate cuts in 2025. Market expectations had been for four just weeks ago, in line with the Fed’s September guidance.
Fed chair Jay Powell told reporters solid growth, improved employment and progress in the battle against inflation meant the central bank was in a “good place”.
But he acknowledged that “policy uncertainty” relating to the incoming Trump administration was a concern for the inflation outlook among some of the committee’s membership.
Fed chair Jay Powell is seen taking reporters’ questions File pic: Federal Reserve
“We just don’t know very much at all about the actual policies, so it’s very premature to try and make any conclusion”, he added.
Government bond yields, which reflect perceived future interest rate paths, ticked upwards.
The dollar found support, gaining 0.5% against both the pound and euro, while major US stock markets retreated.
The Fed’s rate decision was announced just hours before the Bank of England gives its own rate verdict.
No cut is expected while financial markets are expecting a similar message on the possible interest rate path ahead.
UK yields – the effective cost of servicing government debt – have moved sharply higher this month, with the gap between British and German 10-year bond yields rising to its highest level in 34 years earlier on Wednesday.
It reflects the diverging interest rate outlooks for the Bank of England and European Central Bank, which has been cutting rates consistently to boost the euro area’s economy.
The UK’s problem is that the paces for both wage and price growth have accelerated.
At the same time, economic growth has stalled.
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Businesses react to shrinking economy
The scenario presents the Bank with a particular challenge.
Its governor Andrew Bailey has admitted that the budget’s effect on businesses is casting the biggest question mark over the future rate path.
Worries include the extent to which firms seek to recover costs from tax hikes and minimum pay rises in the form of price rises.
On the other hand, the pressure on wage growth could be eased if firms carry out their threat to limit pay growth as a result of the budget burden.
As it stands, UK borrowing costs look set to be higher for longer, hampering the economy as they are designed to do but also driving up the government’s bill to service its debts.
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Chancellor reacts to inflation rise
While the Bank is widely expected to hold off on a cut on Thursday, financial market forecasts for a reduction in February, seen as nailed on just weeks ago, are now running at just 50% in the wake of the latest wage and inflation data.
Just two rate cuts are priced in for 2025 currently.
What the Bank has to say about the price pressures it is currently seeing will be closely scrutinised.
Commenting on the US outlook Matthew Morgan, head of fixed income at Jupiter Asset Management, said: “As it stands, the market expects only two further cuts in the whole of 2025. This is perhaps not surprising given consumer spending, policy uncertainty (particularly around tariffs) and jobs looking in decent health.
“However, we think we are likely to see [US] rate cut expectations increase next year as growth softens. The labour market is clearly cooling, inflation is softening, and Europe and China are a drag on global growth.
“Given the high inflation of the Biden presidency was very unpopular with the public, we think Trump will be wary of overdoing inflationary policies, like tariffs. Together with potential government spending cuts in the US, next year could well see positive conditions for the performance of government bonds.”
The UK economy showed strong growth in the first three months of the year, according to official figures.
Gross domestic product (GDP) – the standard measure of an economy’s value – grew 0.7% in the first quarter of 2025, the Office for National Statistics said.
The rise is better than expected. An increase of just 0.6% was anticipated by economists polled by the Reuters news agency.
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It’s significantly better than the three months previous, in which a slight economic expansion of just 0.1% was reported for the final quarter of 2024.
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The ONS also said there was a small amount of growth last month, as GDP expanded 0.2% in March, which similarly beat expectations.
No growth at all had been forecast for the month.
How did the economy grow?
A large contribution to high GDP growth was an increase in output in the production sector, which rose 1.1%, driven by manufacturing and a 4% increase in water supply, the ONS said.
Also working to push up the GDP figure was 0.7% growth in the biggest part of the UK economy – the services industry.
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‘Here’s the concern with GDP figures’
Wholesale, retail and computer programming services all performed well in the quarter, as did car leasing and advertising, the ONS said.
It shows the economy was resilient, as the country headed into the global trade war sparked by President Trump’s so-called ‘liberation day’ tariff announcement on 2 April.
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The data is welcome news for a government who have identified growing the economy as its number one priority.
Chancellor Rachel Reeves is taking the figures as a political win, saying the UK economy has grown faster than the US, Canada, France, Italy and Germany.
“Today’s growth figures show the strength and potential of the UK economy, ” she said.
“Up against a backdrop of global uncertainty, we are making the right choices now in the national interest.”
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Such GDP numbers may not continue into April as businesses and consumers were hit with a raft of bill rises, and Mr Trump’s tariffs fired the starting gun on a global trade war.
Last month, water, energy and council tax bills rose across the country while employers faced higher wage costs from the rise in their national insurance contributions and the minimum wage.
But above-inflation wage growth and fading consumer caution could continue to boost the economy.
Foreign state investors would be allowed to hold stakes of up to 15% in British national newspapers, ministers are set to announce amid a two-year battle to resolve an impasse over The Daily Telegraph’s ownership.
Sky News has learnt that the Department for Culture, Media and Sport could announce as soon as Thursday that the new limit is to be imposed following a consultation lasting several months.
The decision to set the ownership threshold at 15% follows an intensive lobbying campaign by newspaper industry executives concerned that a permanent outright ban could cut off a vital source of funding to an already-embattled industry.
It would mean that RedBird IMI, the Abu Dhabi state-backed fund which owns an option to take full ownership of the Telegraph titles, would be able to play a role in the newspapers’ future.
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RedBird Capital, the US-based fund, has already said it is exploring the possibility of taking full control of the Telegraph, while IMI would have – if the status quo had been maintained – forced to relinquish any involvement in the right-leaning broadsheets.
One industry source said they had been told to expect a statement from Lisa Nandy, the culture secretary, or another DCMS minister, this week, with the amendment potentially being made in the form of a statutory instrument.
Other than RedBird, a number of suitors for the Telegraph have expressed interest but struggled to raise the funding for a deal.
The most notable of these has been Dovid Efune, owner of The New York Sun, who has been trying for months to raise the £550m sought by RedBird IMI to recoup its outlay.
Another potential offer from Todd Boehly, the Chelsea Football Club co-owner, and media tycoon David Montgomery, has yet to materialise.
RedBird IMI paid £600m in 2023 to acquire a call option that was intended to convert into ownership of the Telegraph newspapers and The Spectator magazine.
That objective was thwarted by a change in media ownership laws – which banned any form of foreign state ownership – amid an outcry from parliamentarians.
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The Spectator was then sold last year for £100m to Sir Paul Marshall, the hedge fund billionaire, who has installed Lord Gove, the former cabinet minister, as its editor.
The UAE-based IMI, which is controlled by the UAE’s deputy prime minister and ultimate owner of Manchester City Football Club, Sheikh Mansour bin Zayed Al Nahyan, extended a further £600m to the Barclays to pay off a loan owed to Lloyds Banking Group, with the balance secured against other family-controlled assets.
Other bidders for the Telegraph had included Lord Saatchi, the former advertising mogul, who offered £350m, while Lord Rothermere, the Daily Mail proprietor, pulled out of the bidding last summer amid concerns that he would be blocked on competition grounds.
The Telegraph’s ownership had been left in limbo by a decision taken by Lloyds Banking Group, the principal lender to the Barclay family, to force some of the newspapers’ related corporate entities into a form of insolvency proceedings.
The newspaper auction is being run by Raine Group and Robey Warshaw.
The DCMS declined to comment.
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