Aggressive Fed move is unlikely to spur a surprise Bank of England cut

LONDON — With traders preparing for the double impact of monetary policy decisions by both the Federal Reserve and the Bank of England, economists told CNBC that a “jumbo” rate cut by the former won’t deter the latter from a rate hold this week.

Markets suggest a more than 60% probability of the Fed opting for a 50 basis point cut — rather than a 25 basis point reduction — on Wednesday, from its current rate range of 5.25% to 5.50%. Either way, this would be Fed’s first rate cut in the current cycle.

Meanwhile, money market pricing for a BOE cut at Thursday’s September meeting dipped from 35% late Tuesday to 26% Wednesday morning, still slightly higher than it was last week. The move came after U.K. inflation came in at 2.2% for August, steady on July and in-line with expectations — thus backing the need for a little more caution in Threadneedle Street.

While Britain’s headline rate has spent five months at or near the central bank’s 2% target, inflation in the services sector — which accounts for a huge 81% of the U.K. economy — has remained stubbornly high, rising to 5.6% in August from 5.2% in July.

Reduced energy prices have also contributed to the decline in the headline figure, with core inflation — which excludes energy, food, alcohol and tobacco — declining at a slower pace.

Sanjay Raja, chief economist at Deutsche Bank, told CNBC a more “forceful” rate cut from the Fed would not necessarily move the dial for the BOE this week, not least because the Monetary Policy Committee generally ratifies its decision around lunchtime on Wednesday ahead of its Thursday announcement. The Fed’s announcement is not due until 7 p.m. London time (2 p.m. ET).

“However, where it could have an impact is in the MPC’s risk management considerations, including opening the door for a discussion on two-sided inflation/growth risks to the economy, and perhaps even emboldening some on the MPC to talk up a more rapid dial down of restrictive policy, given the green light from the Fed,” Raja said.

George Lazarias, chief economist at Forvis Mazars, told CNBC on Wednesday that in developed economies, “services inflation is going up and they are relying on an externality to bring the headline rate down,” he said.

“Headline inflation is coming down because China is losing economic steam faster than it cares to admit and they’re inadvertently deflating the world, which is great for central banks,” he added.

Lazarias explained that this externality “means it would be premature to cut rates aggressively,” both in the U.K. and the U.S. Because of that, he sees neither the Fed cutting by 50 basis points on Wednesday, nor the BOE following up with a Thursday cut this week, even in a bid to boost lackluster economic…