Markets head into this week expecting a split in central banks' strategies. The US Federal Reserve (Fed) is widely tipped to begin cutting rates tomorrow, while the Bank of England (BoE) is forecast to hold steady at its meeting on Thursday, underlining a divergence between two of the world’s most closely watched monetary authorities.
Commentators think the Fed has scope to pivot as US inflation retreats and growth cools, although some warned against moving too forcefully. The BoE, however, was seen as being more constrained, with lingering inflationary pressures and a tight labour market keeping policymakers cautious.
Below, Trustnet explores the expectations for the Fed’s policy shift before turning to the UK, where investors anticipate another month of inaction.
Federal Reserve: Easing begins but inflation will rise
Berenberg economist Atakan Bakiskan was unambiguous that “the Fed will almost certainly deliver a 25 basis-points cut on Wednesday” to lower the target range for its funds rate from 4.25-4.50% to 4.00-4.25%.
Crucially, Bakiskan expects the Fed to present the cut as “proactive”, intended to prevent a further downturn in the labour market rather than inflation being front and centre. Seema Shah, chief global strategist at Principal Asset Management, agreed.
August's consumer prices inflation came in slightly higher than expected, bringing the annual headline increase to 2.9%, 0.2 percentage points higher than last month’s reading and the highest in seven months
However, labour market data has become the more pressing concern.
Shah said: “Notably, the jump in initial jobless claims today shifted focus away from inflation, reinforcing the narrative that the Fed is about to start a sequence of rate cuts.
“The increase in consumer prices was not large enough to shift the Fed’s focus away from recent labour market demand weakness and effectively seals the rate cut next week.”
Bakiskan, however, added a reminder of the banks’ limits: “The Fed cannot really control labour supply”.
Ronald Temple, chief market strategist at Lazard Asset Management, cautioned that despite the cut, he continues to “expect US core inflation to grind higher through year end and into early 2026 when the impact of tariffs is likely to peak”.
Bank of England: Cautious stance
If the Fed is preparing to move, the BoE looks set to stay put. This is “almost certain” for Jeff Brummette, chief investment officer at Oakglen Wealth.
“While an inflation peak is expected in September, the data won’t be confirmed until next month,” he noted, adding that the committee will also be bothered by long-term gilt yields.
“It’s unclear if the rise in yields is being driven more by inflation expectations or concerns over the UK government’s difficult fiscal position, but markets will be hoping for spending cuts in the November budget over any tax rises that might weigh on growth.”
Matthias Scheiber, head of multi-asset solutions at Allspring Global Investment, struck a similar tone.
“Underlying growth in the UK remains weak, productivity growth is weak and the bank has tolerated a weak labour market, with the majority of the committee focusing instead on inflation risks which have materialised,” he said.
For investors, this implies “a skewed balance of risks”.
“We do think some further easing is necessary, despite elevated inflation risks. We expect gilt market volatility (particularly in the back-end) to remain elevated going into the Autumn statement,” he said.
“We see more value in non-UK assets at the moment, particularly in fixed income and having taken profits on our overweight to UK equities earlier in the year.”
Finally, Michael Metcalfe, head of macro strategy at State Street Global Markets, suggested that judging by interest rate market pricing, this week's BoE meeting should be “one of the least interesting of the major central banks”, with bond markets now not fully pricing another 25 basis points ease until next April.
“The easing cycle that has so far delivered 125 basis points worth of cuts in a year is assumed to be on hold for now. Moves at the long-end of the UK curve, however, may yet produce market-moving news from the September meeting, which brings with it the annual MPC judgement on the pace of quantitative tightening,” he said.
“There is a case for a dramatic end to the tightening, a relatively less hawkish outcome that would potentially challenge investors' current GBP overweight positions against the dollar, but may help the investor unwinds currently underway in 10 and 30-year gilts”.