Deep Dive: The ECB and BoE have limited room to cut rates ahead of the Fed

Cuts do not happen in 'domestic vacuum'

The European Central Bank and Bank of England have limited scope to cut interest rates ahead of the US Federal Reserve without running into trouble with the bond markets and currency devaluation.

The ECB decided to cut interest rates by 25 basis points to 3.75% in June. The decision, largely taken on the back of dampening inflation, is likely to be the only cut this summer from the major central banks. European officials are now facing resurging price pressure, with services price inflation in the eurozone increasing from 3.7% in April to 4.1% in May and remaining unchanged in June. At the same time, the BoE's Monetary Policy Committee has acted more cautiously, holding interest rates at 5.25%. Fund managers have argued that both central banks cannot diverge significantly f...