Following the Fed: Should the Bank of England follow a global rate hiking cycle?

How much should the actions of other central banks, particularly the Federal Reserve, influence the Bank of England decision over our own interest rates?

On November 5^th the Bank of England’s Monetary Policy Committee (MPC) decided to raise interest rates to 4.00% for the first time in three years. In their September and July meetings, the MPC had voted 6-3 in favour of keeping the rate at 3.75%. This showed slightly more dissent, after the June result of seven for holding and two for raising the rates. However, with the Iran war dragging on and inflation reaching 3.5%, above the 2% target, eight out of nine MPC members voted to increase the rate by 0.25%, with the remaining member in favour of a 0.5% rise.

As major economies face inflationary pressures, largely caused by conflict in the Middle East, central banks around the world have opted to raise interest rates. The Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of Japan all increased their bank rates in September and the Bank of England has finally followed suit, two months later. With major tightening going on around the UK, the question arises as to what extent should the Bank of England follow the actions of other central banks, particularly that of the Federal Reserve.

It is first necessary to understand how rates rising around the globe could impact the UK. Consider the period from September of this year to today, where the Fed, ECB and Bank of Japan had increased their interest rates, but the Bank of England’s rate remained the same so was relatively lower than before. Therefore, from the perspective of investors, British assets are now less attractive, as they will yield lower returns year on year. In theory, capital should flow towards these now higher-yielding economies, putting downward pressure on Sterling, making imports more expensive. 

Since the United Kingdom’s financial markets are deeply integrated with the rest of the globe, it is logical that the Bank of England does not turn a blind eye to rates worldwide. A recent case comes from when the Fed raised rates aggressively in 2022 while the ECB, Bank of Japan, and Bank of England moved relatively more incrementally. Hence, the Euro, Sterling and Yen weakened as investors chased higher returns in the US economy. As the US acts, those that did not move were impacted, signifying that the Bank of England cannot take an entirely passive role as the world’s monetary environment develops.

In a speech in January 2026, Bank of England economist Megan Greene stated that,

‘From 1994 to Q3 2025, US monetary policy and global financial conditions together explain 33% of the variation in UK CPI inflation and 28% of the variation in UK real GDP growth’.

Furthermore, research from the International Monetary Fund finds that a 100 basis-point rate increase in the United States is associated with a 30-60 basis point increase in domestic rates in open economies in their sample. 

Catherine Mann, also of the Bank of England, emphasises this, drawing on the ‘Global Financial Factor’, which the US dominates, due to the size of its economy and the dollar being the dominant reserve currency. Her research showed that the UK is particularly exposed to this because of large cross-border financial flows. Monetary policy of the US is of particular importance, with empirical results showing that the UK economy is especially sensitive to American tightening.

Disagreement arises over the extent to which the Bank of England policy should emulate that of the US, particularly when other banks are following the Fed. 

The Bank of England should consider wider monetary trends when setting rates. Not only should the BoE consider pound depreciation, but also global shock induced inflation. The current rises in prices due to war in the Middle East, may require a shared response, specifically a collective tightening. Furthermore, if the Bank of England was seen to be lagging behind in their monetary policy, the public may begin to question their commitment to combatting inflation, un-anchoring expectations. Hence, central bank credibility would need to be maintained by converging monetary policy with other banks.

However, the MPC must also recognise that monetary policy should be predominately driven by the situation in the UK. Governor of the Bank, Andrew Bailey, has cited the delayed impact of global energy costs on price and wage setting in the UK as the impact of global shocks, such as an oil crisis, vary from country to country as energy mixes and security differ. When an oil crisis arises, the US, which is an energy exporter, faces inflation like other nations, so tightens monetary policy. However, compared with energy importing nations, it is cushioned from the shock, so requires less tightening than energy importers like Britain, so the BoE cannot simply emulate US monetary policy.

Additionally, the structure of the UK economy differs from that of other nations. The UK has more short-term mortgage holders than Eurozone nations, so a rate change impacts the mortgage rates faster and thus household reacts more. 

The central bank must also deal with the United Kingdom’s fiscal stability and gilt markets. After gilt prices fell sharply following the 2022 minibudget, leveraged liability-driven investment (LDI) funds faced large margin calls and were forced to sell gilts, pushing prices down further. The BoE had to purchase long-dated gilts to restore market stability, while trying to tighten policy alongside the Fed and ECB. Neither the ECB nor Fed faced this shock, because it was derived from UK-specific fiscal policy and the structure of British pension funds. This furthers the case for monetary policy being driven by the domestic situation as the UK possesses a distinct fiscal environment.

The argument that collective monetary action is justifiable is complicated. Episodes of global tightening, according to the IMF, are associated with greater financial effects compared to asynchronous tightening events. Alistair Dieppe, of the ECB, and David Brignone, of the Bank of England, highlight the importance of spillover effects of synchronised tightening and reference the importance of a quick response to these spillovers to minimise the slowdowns in growth. While monetary synchronisation can help fight endemic inflation globally, central banks should be wary not to underestimate the potential for significant damage to productivity. 

This month’s decision to increase rates symbolises the value of monetary independence, rather than follow global developments. It is too early to judge whether the decision to delay tightening has been successful, but a clear case can be made for why the Bank held off. CPI inflation was 3.1% in August, wage growth was moderating and there was limited evidence of second round inflationary effects. However, the case has now strengthened, with CPI inflation at 3.5%, greater than expected economic activity and expectations of second round effects. Crucially, the Bank of England is simply converging with global monetary trends, rather than being synchronised, which may have been demonstrated had they tightened in September. 

As one of the most open economies in the G20, Britain cannot turn a blind eye to monetary developments worldwide, specifically in the United States. Rate rises across the major economies have real implications in Britain, though the case for the Bank of England dogmatically following external global forces is weak. Britain has central bank independence: a useful, individual tool to manage the economy. The implications deriving from international monetary policy should be weighted within the broader decision the MPC makes with domestic conditions, which should take precedence.