Friday Forward Guidance ...
This is our Friday Forward Guidance for Friday 7th March. Every week we update our scenario forecasts for base rates in the U.S., UK and Europe over a three year period. We also include our expectations for inflation, as an input to the central bank reaction function, in the Saturday Economist updates.
At its meeting ending on 5 February 2025, the MPC voted by a majority of 7–2 to reduce Bank Rate by 0.25 percentage points, to 4.5%. Two members, Swati Dhingra and Catherine L Mann, preferred to reduce Bank Rate by 0.5 percentage points, to 4.25%.
In the U.S, on the 29th January, the FOMC decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent.
In Europe, on the 6th March the European Central Bank The Governing Council decided to lower the three key ECB interest rates by 25 basis points. The interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will be decreased to 2.50%, 2.65% and 2.90% respectively.
At its meeting ending on 5 February 2025, the MPC voted by a majority of 7–2 to reduce Bank Rate by 0.25 percentage points, to 4.5%. Two members, Swati Dhingra and Catherine L Mann, preferred to reduce Bank Rate by 0.5 percentage points, to 4.25%.
In the U.S, on the 29th January, the FOMC decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent.
In Europe, on the 6th March the European Central Bank The Governing Council decided to lower the three key ECB interest rates by 25 basis points. The interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will be decreased to 2.50%, 2.65% and 2.90% respectively.
Fed Funds Rate ...
In the latest move, on the 29th January, the FOMC decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent.
Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee's 2 percent objective but remains somewhat elevated.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.
Inflation CPI eased to 2.8% in February from 3.0% in January. The underlying rate (excluding food and energy costs) eased to 3.1% from 3.3%.
Growth in the U.S. was 2.9% in the first nine months of the year, compared to growth of 2.5% in 2023. The US economy is in better shape than economists and the Fed had expected. The Fed has upgraded the forecast of growth in the year to 2.5% in 2024 and 2.1% in 2025. Early BEA data suggests growth of 2.8% in 2024.
The Summary of Economic Projections, suggested the Fed Funds rate will average around 3.9% end of 2025 and 3.4% Q4 2026. The Fed Blue Dot forecasts suggest the Long Run average rate in the U.S is now 3.00%. Latest outlook will be over shadowed by the Trump tariff decisions.
Our model rate is around the 4.00% -4.50% level. U.S. ten year rates closed at 4.43% this week. Markets expect a more gradual approach from the Fed as they await developments in the new administration.
In the latest move, on the 29th January, the FOMC decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent.
Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee's 2 percent objective but remains somewhat elevated.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.
Inflation CPI eased to 2.8% in February from 3.0% in January. The underlying rate (excluding food and energy costs) eased to 3.1% from 3.3%.
Growth in the U.S. was 2.9% in the first nine months of the year, compared to growth of 2.5% in 2023. The US economy is in better shape than economists and the Fed had expected. The Fed has upgraded the forecast of growth in the year to 2.5% in 2024 and 2.1% in 2025. Early BEA data suggests growth of 2.8% in 2024.
The Summary of Economic Projections, suggested the Fed Funds rate will average around 3.9% end of 2025 and 3.4% Q4 2026. The Fed Blue Dot forecasts suggest the Long Run average rate in the U.S is now 3.00%. Latest outlook will be over shadowed by the Trump tariff decisions.
Our model rate is around the 4.00% -4.50% level. U.S. ten year rates closed at 4.43% this week. Markets expect a more gradual approach from the Fed as they await developments in the new administration.
Bank Base Rate ...
At its meeting ending on 5 February 2025, the MPC voted by a majority of 7–2 to reduce Bank Rate by 0.25 percentage points, to 4.5%. Two members, Swati Dhingra and Catherine L Mann, preferred to reduce Bank Rate by 0.5 percentage points, to 4.25%.
GDP growth has been weaker than expected at the time of the November Monetary Policy Report, and indicators of business and consumer confidence have declined. GDP growth is expected to pick up from the middle of this year. The bank has reduced the forecast for growth this year (2025) to 0.75% from 15%.
Inflation CPI basis jumped to 3.0% in January from 2.5% in Deceember . CPI(g) goods inflation moved to 1.0% from 0.7% prior month. CPI(s) Service Sector inflation increased to 5.0% from 4.4%. Core inflation increased to 3.7% from 3.2%. The Bank now expects inflation to rise to up to 3.7% in Q3 2025, then 2.8% in 2026, before returning to the 2.0 per cent target in 2027.
So what can we make of it all? The Bank remains concerned about the high level of wage settlements and service sector inflation. For the moment, our overall forward guidance outlook remains unchanged. We model base rates at 4.5% in Q1 2025 but not much more to follow in 2025. Weak growth has led to expectations of two further cuts this year, ending the year at 4.0%.
Ten year gilt rates closed at 4.57% this week. The Bank's favored OIS swap rates suggest 4.0% could be the floor to cuts over the forecast three year period. 4.0% to 4.5% the scenario spread for base rates. More news on service sector inflation and growth awaited. NI hikes won't help.
* Long Term Note : In the UK, prior to the Great Financial Crash [2000 - 2008] the average inflation rate was 2.0%, the average UK bank rate was 4.50%. Ten year gilt yields averaged 4.50%, real GDP growth averaged 2.5%, earnings averaged 3.5%, the unemployment rate averaged 5%.
At its meeting ending on 5 February 2025, the MPC voted by a majority of 7–2 to reduce Bank Rate by 0.25 percentage points, to 4.5%. Two members, Swati Dhingra and Catherine L Mann, preferred to reduce Bank Rate by 0.5 percentage points, to 4.25%.
GDP growth has been weaker than expected at the time of the November Monetary Policy Report, and indicators of business and consumer confidence have declined. GDP growth is expected to pick up from the middle of this year. The bank has reduced the forecast for growth this year (2025) to 0.75% from 15%.
Inflation CPI basis jumped to 3.0% in January from 2.5% in Deceember . CPI(g) goods inflation moved to 1.0% from 0.7% prior month. CPI(s) Service Sector inflation increased to 5.0% from 4.4%. Core inflation increased to 3.7% from 3.2%. The Bank now expects inflation to rise to up to 3.7% in Q3 2025, then 2.8% in 2026, before returning to the 2.0 per cent target in 2027.
So what can we make of it all? The Bank remains concerned about the high level of wage settlements and service sector inflation. For the moment, our overall forward guidance outlook remains unchanged. We model base rates at 4.5% in Q1 2025 but not much more to follow in 2025. Weak growth has led to expectations of two further cuts this year, ending the year at 4.0%.
Ten year gilt rates closed at 4.57% this week. The Bank's favored OIS swap rates suggest 4.0% could be the floor to cuts over the forecast three year period. 4.0% to 4.5% the scenario spread for base rates. More news on service sector inflation and growth awaited. NI hikes won't help.
* Long Term Note : In the UK, prior to the Great Financial Crash [2000 - 2008] the average inflation rate was 2.0%, the average UK bank rate was 4.50%. Ten year gilt yields averaged 4.50%, real GDP growth averaged 2.5%, earnings averaged 3.5%, the unemployment rate averaged 5%.
Euro Base Rate ...
In Europe, on the 6th March the European Central Bank The Governing Council decided to lower the three key ECB interest rates by 25 basis points. The interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will be decreased to 2.50%, 2.65% and 2.90% respectively.
Official figures showed that inflation in the Euro Area eased to 2.4 per cent in February from 2.5 per cent in January. Inflation in the European Union moved to 2.8% in January from 2.7% in December.
Staff now see headline inflation averaging 2.3% in 2025, 1.9% in 2026 and 2.0% in 2027. The upward revision in headline inflation for 2025 reflects stronger energy price dynamics. For inflation excluding energy and food, staff project an average of 2.2% in 2025, 2.0% in 2026 and 1.9% in 2027.
Euro area growth is expected to be up by 0.25% in 2024 and 1.0% in 2025. [All data year on year basis]. EU growth up by 0.25% in 2024 with similar growth rate to EU area in 2025.
In Europe, on the 6th March the European Central Bank The Governing Council decided to lower the three key ECB interest rates by 25 basis points. The interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will be decreased to 2.50%, 2.65% and 2.90% respectively.
Official figures showed that inflation in the Euro Area eased to 2.4 per cent in February from 2.5 per cent in January. Inflation in the European Union moved to 2.8% in January from 2.7% in December.
Staff now see headline inflation averaging 2.3% in 2025, 1.9% in 2026 and 2.0% in 2027. The upward revision in headline inflation for 2025 reflects stronger energy price dynamics. For inflation excluding energy and food, staff project an average of 2.2% in 2025, 2.0% in 2026 and 1.9% in 2027.
Euro area growth is expected to be up by 0.25% in 2024 and 1.0% in 2025. [All data year on year basis]. EU growth up by 0.25% in 2024 with similar growth rate to EU area in 2025.
Scenario Comparisons ...
This is the table of scenario comparisons. We would expect UK rates to lag not lead the US pattern. EU rates would follow the US/UK lead. Inflation may subside sooner than expected. Central banks may worry about the shock to growth. This is a scenario not the plan.
We model the long run UK rate at 4.0% - 4.5%. In the UK, prior to the Great Financial Crash [2000 - 2008] the average inflation rate was 2.0%, the average UK bank rate was 4.50%. Ten year bond yields averaged 4.50%.
This is the table of scenario comparisons. We would expect UK rates to lag not lead the US pattern. EU rates would follow the US/UK lead. Inflation may subside sooner than expected. Central banks may worry about the shock to growth. This is a scenario not the plan.
We model the long run UK rate at 4.0% - 4.5%. In the UK, prior to the Great Financial Crash [2000 - 2008] the average inflation rate was 2.0%, the average UK bank rate was 4.50%. Ten year bond yields averaged 4.50%.
That's all for this week ... "to understand the markets you have to understand the economics" and we do ...
© 2024 John Ashcroft, Economics, Strategy and Financial Markets, experience worth sharing.
© 2024 John Ashcroft, Economics, Strategy and Financial Markets, experience worth sharing.
