The United States central bank announced on Wednesday a significant cut in interest rates, reducing them to a range of 4% to 4.25%. This comes as welcome news since it is the first interest rate reduction since December. More importantly, it represents a real change in the Federal Reserve’s direction on monetary policy. The move comes amidst ongoing conversations around inflation vs. economic growth. Central banks throughout Europe are following suit, leaving rates unchanged.
The Bank of England’s decisions regarding interest rates play a crucial role in shaping the financial landscape for homeowners in the UK. For context, August of 2023 has interest rates at 5.25%. This has left the Bank of England open to criticism for sticking with its steering controls, forcing it to recast its policies and raise economic growth. Analysts largely do not expect Thursday’s vote on interest rates to be a nail biter, with no increase in rates expected.
By the beginning of January 2021, interest rates in the UK had fallen to historically low levels of 0.1%. Since then, they have undergone significant fluctuations. As recently as August 2024, the Bank of England reduced its policy rate to 5%. By November, they had moved the goalpost again, reducing it to 4.75%. The streak didn’t end there—cuts followed with reductions to 4.5% in February 2025, and then down to 4.25% in May of this year. Most recently, on August 7, the Bank lowered rates to an unprecedented 4.0%.
While the government has pushed through these cuts, inflation is still a serious topic in UK politics today. The Consumer Prices Index inflation rate was 3.8% in August, well over the Bank of England’s target rate of 2%. Bank of England Governor Andrew Bailey described the decision to lower interest rates as “finely balanced.” This has showed the challenge of recalibrating monetary policy in response to new and shifting economic signals.
Last Thursday, the European Central Bank (ECB) announced its decision to hold interest rates unchanged at 2%. This is an important decision that underlines the diverging paths that central banks are pursuing across the Atlantic. The subtlety of this decision is another example of the ECB’s hawkish tilt away from growth and towards inflation in the Eurozone.
Despite the Bank of England’s initial cuts in interest rates, the UK government hopes to see more substantial cuts to encourage growth in business investment across the UK. The ongoing inflationary pressures make that goal a challenge. Rachel Springall, a financial expert, noted that “many will be waiting with bated breath for the Budget. This waiting game, alongside forecasts for inflation to remain above target, makes it less likely for the Bank of England to make further rate cuts this year.”
The world economic environment is changing rapidly. Central banks are on a wild rampage with actions that will be critical to both homeowners and businesses. The Federal Reserve’s recent decision might revive similar discussions at the Bank of England. Still, the multifaceted realities of inflation and sustainable economic growth will decisively dictate what happens next, regardless of their will.