Bank Of England May Delay Rate Cuts Over Persistent Inflation: Will US Fed Follow Suit?

Megan Greene, external member of the Monetary Policy Committee at the Bank of England told CNBC that Britain's central bank may delay cutting interest rates over 'persistent inflation'. Greene's remarks come just after the central bank on Dec. 2, cut the amount of capital it estimates lenders need to hold, making its first reduction to bank capital demands since the global financial crisis in a bid to boost lending and stimulate the economy.

BoE's monetary policy stance has put the spotlight on the US Federal Reserve, which is set to unveil the ninth monetary policy meeting of 2025 on Dec. 10, amid a largely divided rate-setting panel of the central bank.

The policymakers of the Federal Open Market Committee (FOMC) have largely differing views on the upcoming interest rate decision. Last month, the US Fed cut rates by 25 basis points even as policymakers cautioned that doing so could risk the muted inflation and a loss of public trust in the US Fed.

The US Federal Reserve's 12-member committee is divided than ever over whether to cut interest rates in the upcoming December policy meeting. Some analysts believe the US Fed is 'flying blind' into its final meeting of the year. The US government shutdown has triggered the delay of key economic data which is otherwise vital to the Fed's monetary policy decisions.

Notably, the US Fed's dual mandate from Congress is to keep inflation low and employment high. However, these readings are currently running in the opposite direction, making the Fed's task more challenging to set a policy stance. It is important to note that in the Sept meeting, FOMC's dot-plot of projections had predicted two more rate cuts in 2025.

Going by that agenda, US Fed Chairman Jerome Powell is likely to deliver a quarter-point rate cut on Dec. 10, despite the latest economic data pulling the Fed's decision-making in opposite directions. Traders are pricing in an 87.6% chance of a 25-basis-point interest rate cut in Dec, according to CME Group's FedWatch Tool.

Domestic brokerage Elara Securities expects the FOMC to deliver a 25 bps cut at the upcoming meeting, taking the US Fed funds rate (upper bound) to 3.75%. However, it warns that the FOMC outcome would be a close call, where there would be voices in the Committee, supporting a pause as they await signs of economic momentum from pending data releases.

"After the Dec. meet, we expect the US Fed to pause in Q1. Inflation is likely to remain sticky in Q1CY26, due to continued and gradual pass-through of tariffs and adverse seasonal effects. The labour market, while it remains weak, can see stabilization, as trade uncertainty recedes post the US-China deal," said the brokerage.

The Bank of England said its capital framework review showed that the benchmark for Tier 1 capital requirements for lenders, set at 14% since 2015, could be reduced by one percentage point to 13%.

In its Financial Stability Report, the BoE said it would launch a review on enhancing the usability of buffers and on the implementation of the leverage ratio, initiatives that could further ease requirements for lenders.

The BoE also flagged risks to Britain's financial system had risen this year due to stretched valuations of companies investing in artificial intelligence, risky lending to big companies and some trading in government bond markets.

The comments in its half-yearly report build on warnings made in recent months by BoE Governor Andrew Bailey and other policymakers, although it also accompanied the first reduction in capital requirements for British banks since the 2008 global financial crisis.

Investor enthusiasm for artificial intelligence had pushed share valuations in the United States to their most stretched since the dotcom bubble, and in Britain to their highest since the global financial crisis, the central bank estimated.

"Deeper links between AI firms and credit markets, and increasing interconnections between those firms, mean that, should an asset price correction occur, losses on lending could increase financial stability risks," the BoE said.