USA Holds Interest Rates but Surprise UK Rates Increase

The US Federal Reserve confirmed yesterday that it would hold interest rates for now but cut back on its stimulus programme with a potential close off by the end of March and suggested that interest rates may increase 3 times in 2022 by 0.33% increments.  All this despite the US economy heating up with US consumer inflation at 6.8%pa in November.

Contrastingly, the Bank of England Monetary Policy Committee has today confirmed that base rates will rise from 0.1%pa to 0.25%pa citing inflation concerns for the increase for obvious reasons.  UK CPI inflation was confirmed yesterday by the Office for National Statistics at 5.1%pa for November with the old measure of inflation, RPI sitting at 7.1%pa.

Comment

We suggested yesterday that we thought the Bank of England would follow the US and likely hold rates but surprisingly they have increased them despite concerns that the omicron variant may hit the economy anyway in January.

The reality is that interest rates were due to rise sooner rather than later and at 0.25%pa, it is only a return to the start of the pandemic in March 2020 where rates were cut from 0.75%pa to 0.25%pa on 11^th March 2020 and then just a few days later on 19^th March 2020 to 0.1%pa.

We do not believe a rate increase of 0.15%pa from 0.1% to 0.25% is going to dramatically alter the economy and it will certainly not help savers but we suggest it does give the Bank of England some credibility which it did risk losing.