The US Federal Reserve has lowered the cost of borrowing 0.25% to its lowest rate since November 2022 and signalling divergence with the UK where talk has turned to “stagflation”.

It is the third cut in a year and means the Fed has cut a full percentage point since initiating its cutting cycle in September. It now stands at to 4.25-4.50%.

The Bank of England is expected to leave UK interest rates unchanged at 4.75% as it battles with persistent inflationary pressures and wage growth.

After the latest rise in UK inflation to 2.36%, Julian Jessop, economics fellow at the free market think tank the Institute of Economic Affairs, said: “This morning’s news surely kills off any chance of a rate cut this week.

“And combined with stalling economic growth and the early signs of a slump in the labour market, talk of ‘stagflation’ [a combination of inflation and low growth] could dampen confidence further.

“There is a danger of overdoing the gloom. Most households should still see their real incomes rise. The increases in public spending will also offset at least some of the weakness in the private sector. Broad money is now growing at a decent pace.

“There should therefore only be a mild bout of stagflation – or ‘stagflation-lite’ – before inflation falls back and the economy picks up again over the course of 2025. Compared to past episodes, any declines in output and increases in inflation and unemployment should be relatively small.

“But the new government’s promise to ‘kick start’ economic growth looks even more hollow, and the chances of a much worse outcome are increasing.

“In particular, the Bank will have to do a good job tomorrow in reassuring people that interest rates can still be cut gradually next year, even with inflation now heading in the wrong direction.”

The Fed’s rate cut comes despite inflation rising for the second consecutive month to 2.7% in November.

The US economy also shows no signs of slowing down, expanding at an annualised 2.8% YoY in Q3 coupled with a jobs market that came roaring back to life in November.

Isaac Stell, investment manager at Wealth Club, said: “With an economy that’s going gangbusters and an incoming president with a fiscally loose agenda, you wonder why the Fed felt it necessary to cut.

“Is this to curry favour with the incoming administration or is there a bump in the road the Fed can see that the rest of us are missing.”

London stocks edged higher, buoyed by an in-line UK inflation reading leading to hopes for steady monetary policy from the Bank of England.

The FTSE 100 index ended the session up 0.05% at 8,199.11 points.

Aerage UK house prices rose 3.4% in the year to October, up from September’s 2.8% growth, according to data from the ONS.

England saw a 3% increase, while Scotland and Wales posted gains of 5.5% and 4%, respectively.

Manufacturing output in the UK saw its sharpest quarterly drop since mid-2020, according to the CBI’s industrial trends survey.

On the equity markets, Ashtead Group rose 1.57%, benefitting from a weaker pound. National Grid dipped 1.09% after unveiling plans to invest up to £35bn in the UK’s electricity network between April 2026 and 2031.