Friday Forward Guidance ...
This is our Friday Forward Guidance for Friday 21st 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 19 March 2025, the MPC voted by a majority of 8–1 to maintain Bank Rate at 4.5%. One member Swati Dhingra, preferred to reduce Bank Rate by 0.25 percentage points, to 4.25%.
In the U.S, on the 19th March, 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 19 March 2025, the MPC voted by a majority of 8–1 to maintain Bank Rate at 4.5%. One member Swati Dhingra, preferred to reduce Bank Rate by 0.25 percentage points, to 4.25%.
In the U.S, on the 19th March, 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 19th March, 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. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation 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. is estimated at 2.8% in 2024 according to the latest BEA data. The Fed has Downgraded the forecast of growth in the current year 2025 to 1.7% from the earlier December forecast of 2.1%. Growth in 20026 has also been downgraded to 1.8% from 2.0%. Latest outlook has been over shadowed by the Trump tariff decisions and uncertainty arising.
Inflation PCE basis is expected to be around the 2.7% level at the end of this years, easing to 2.2% by the end of 2026 and 2.0% by the end of 2027.
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%. Markets now expect two possible rate cuts this year. U.S. ten year rates closed at 4.20% this week
Our model rate is around the 4.00% -4.50% level. .
In the latest move, on the 19th March, 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. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation 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. is estimated at 2.8% in 2024 according to the latest BEA data. The Fed has Downgraded the forecast of growth in the current year 2025 to 1.7% from the earlier December forecast of 2.1%. Growth in 20026 has also been downgraded to 1.8% from 2.0%. Latest outlook has been over shadowed by the Trump tariff decisions and uncertainty arising.
Inflation PCE basis is expected to be around the 2.7% level at the end of this years, easing to 2.2% by the end of 2026 and 2.0% by the end of 2027.
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%. Markets now expect two possible rate cuts this year. U.S. ten year rates closed at 4.20% this week
Our model rate is around the 4.00% -4.50% level. .
Bank Base Rate ...
At its meeting ending on 19 March 2025, the MPC voted by a majority of 8–1 to maintain Bank Rate at 4.5%. One member Swati Dhingra, preferred to reduce Bank Rate by 0.25 percentage points, to 4.25%.
Since the MPC’s previous meeting, global trade policy uncertainty has intensified, and the United States has made a range of tariff announcements, to which some governments have responded. Other geopolitical uncertainties have also increased and indicators of financial market volatility have risen globally.
While UK GDP growth estimates have been slightly stronger than expected at the time of the February Monetary Policy Report, business survey indicators generally continue to suggest weakness in growth and particularly in employment intentions. In recent quarters, subdued activity has been judged to reflect both demand and supply factors.
Twelve-month CPI inflation eased to 2.6% in March from 2.8% in February, slightly lower than expected Domestic price and wage pressures are moderating, but remain somewhat elevated. Although global energy prices have fallen back recently, they remain higher than last year and CPI inflation is still projected to rise to around 3.75% in 2025 Q3.
While inflation is expected to fall back thereafter, the Committee will pay close attention to any consequent signs of more lasting inflationary pressures.
Inflation CPI basis eased to 2.6% in March from 2.8% in February . CPI(g) goods inflation moved to 0.6% from 0.8% prior month. CPI(s) Service Sector inflation eased to 4.7% from 5.0%. Core inflation eased to 3.4% from 3.5%. 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 4.50% 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. The latest "Agents" survey suggests businesses are bracing themselves for the tax hike when employers' National Insurance increases next month. Most have paused or frozen hiring already and are in "wait and see" mode to see how things pan out.
* 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 17th April the European Central Bank Governing Council decided to lower the three key ECB interest rates by 25 basis points. In particular, the decision to lower the deposit facility rate – the rate through which the Governing Council steers the monetary policy stance – is based on its updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. The interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will be decreased to 2.25%, 2.40% and 2.65% respectively, with effect from 23 April 2025.
Official figures showed that inflation in the Euro Area eased to 2.2 per cent in March from 2.3 per cent in February. Inflation in the European Union moved to 2.5% in March from 2.7% prior month.
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 17th April the European Central Bank Governing Council decided to lower the three key ECB interest rates by 25 basis points. In particular, the decision to lower the deposit facility rate – the rate through which the Governing Council steers the monetary policy stance – is based on its updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. The interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will be decreased to 2.25%, 2.40% and 2.65% respectively, with effect from 23 April 2025.
Official figures showed that inflation in the Euro Area eased to 2.2 per cent in March from 2.3 per cent in February. Inflation in the European Union moved to 2.5% in March from 2.7% prior month.
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.
