Central Banks Unlikely to Follow Fed’s Lead on Interest Rate Cuts

According to Bank of New York Mellon’s analysis, the Bank of England and the European Central Bank are not expected to follow the Federal Reserve’s sharp 50 basis point interest rate cut. Instead, they will focus on domestic issues, indicating that other central banks will not passively follow the Fed’s lead.

The probability of the Fed cutting interest rates by 50 basis points has increased to 60%, up from 30% last week. Historically, central banks have followed the Federal Reserve’s example when formulating their own policies, seeking to minimize idiosyncratic risks.

Geoffrey Yu, an economist at Bank of New York Mellon, stated, “Under normal circumstances, other major economies should continue to implement easing policies, hoping to stimulate the economy by lowering interest rates and ensuring that the exchange rate of their currencies against the U.S. dollar is not too high to avoid harming exports.”

However, Yu noted that it is no longer certain whether peers will passively follow the Fed’s lead. He cited the European Central Bank’s decision last week as an example, which showed a tendency to continue adopting restrictive policies, even hawkish policies.

The Bank of England is expected to remain cautious in its decision-making this week, with the forecast suggesting that the next rate cut will take place in October or November. The European Central Bank announced a 25 basis point interest rate cut on September 12, with the next decision scheduled for October 17.

Pound Expected to Strengthen Against the Dollar

ING analyst Francesco Pesole predicted that the pound would likely strengthen as the Bank of England is unlikely to cut interest rates this week. Pesole stated that British economic data hindered market expectations for the Bank of England to cut interest rates as sharply as the Federal Reserve, which could lead to the pound extending its gains against the dollar.

Lee Hardman, an analyst at Mitsubishi UFJ, suggested that if the pound falls against the dollar this week, it may be a short-term buying opportunity, given that the Bank of England is expected to cut interest rates slower than the Federal Reserve.

GBP/USD Daily Chart

At 10:30 Beijing time on September 12, GBP/USD was trading at 1.3204/05.