Friday Forward Guidance ...
This is our Friday Forward Guidance for Friday 7th August 2026. 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 29 July 2026, the Monetary Policy Committee (MPC) voted by a majority of 6–3 to maintain Bank Rate at 3.75%. Three members voted to increase Bank Rate by 0.25 percentage points, to 4%.In response to events in the Middle East, crude and refined energy prices have remained volatile and higher than pre-conflict. The impact of the energy shock on the UK economy remains uncertain. Monetary policy cannot influence energy prices but is being set to ensure that the economic adjustment to them occurs in a way that achieves the 2% inflation target sustainably. The policy stance required to achieve this will depend on the scale and duration of the shock, and how it propagates through the economy including via financial conditions.
In the U.S, in the latest move, at its meeting on the 29th July the FOMC decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent, in support of the Federal Reserve's dual mandate. The Committee is continuing its policy of maintaining ample reserves in the banking system.Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little.
Inflation remains elevated relative to the Committee's 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability.
Voting against the monetary policy action were Beth M. Hammack, Neel Kashkari, and Lorie K. Logan, who preferred to raise the target range for the federal funds rate by 1/4 percentage point at this meeting.
In Europe, at its meeting on 23rd July, The Governing Council today decided to keep the three key ECB interest rates unchanged. The outlook for energy prices, while highly volatile, currently stands close to the baseline of the June Eurosystem staff projections and well above the levels recorded prior to the conflict in the Middle East. Uncertainty remains high and the full inflationary impact of the energy shock has yet to play out. The Governing Council is therefore closely monitoring the intensity and duration of the shock, as well as its indirect and second-round effects. The Governing Council is committed to setting monetary policy to ensure that inflation stabilises at its 2% target in the medium term.
Fed Funds Rate ...
In the U.S, in the latest move, at its meeting on the 29th July the FOMC decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent, in support of the Federal Reserve's dual mandate. The Committee is continuing its policy of maintaining ample reserves in the banking system.Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little.
Inflation remains elevated relative to the Committee's 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability.
Voting against the monetary policy action were Beth M. Hammack, Neel Kashkari, and Lorie K. Logan, who preferred to raise the target range for the federal funds rate by 1/4 percentage point at this meeting.
Inflation CPI eased to to 3.5% in June from 4.2% in May. The underlying rate (excluding food and energy costs) was 2.6% (2.9%)).
"Prior to the U.S. strikes in the Middle East, futures were still pricing two cuts for the full year, but that was always questionable. We model no further cuts in the current year at this time. The Feed Blue Dot forecasts suggest one rate rise later in the year.
In the U.S, in the latest move, at its meeting on the 29th July the FOMC decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent, in support of the Federal Reserve's dual mandate. The Committee is continuing its policy of maintaining ample reserves in the banking system.Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little.
Inflation remains elevated relative to the Committee's 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability.
Voting against the monetary policy action were Beth M. Hammack, Neel Kashkari, and Lorie K. Logan, who preferred to raise the target range for the federal funds rate by 1/4 percentage point at this meeting.
Inflation CPI eased to to 3.5% in June from 4.2% in May. The underlying rate (excluding food and energy costs) was 2.6% (2.9%)).
"Prior to the U.S. strikes in the Middle East, futures were still pricing two cuts for the full year, but that was always questionable. We model no further cuts in the current year at this time. The Feed Blue Dot forecasts suggest one rate rise later in the year.
UK Bank Base Rate ...
At its meeting ending on 29 July 2026, the Monetary Policy Committee (MPC) voted by a majority of 6–3 to maintain Bank Rate at 3.75%. Three members voted to increase Bank Rate by 0.25 percentage points, to 4%.
In response to events in the Middle East, crude and refined energy prices have remained volatile and higher than pre-conflict. The impact of the energy shock on the UK economy remains uncertain. Monetary policy cannot influence energy prices but is being set to ensure that the economic adjustment to them occurs in a way that achieves the 2% inflation target sustainably. The policy stance required to achieve this will depend on the scale and duration of the shock, and how it propagates through the economy including via financial conditions.
CPI inflation has fallen to 2.6% since the previous meeting, although it is expected to rise later this year as the effects of higher energy prices continue to pass through. The risk of material second-round effects in price and wage-setting, against which policy needs to lean, is greater the longer higher energy prices persist. There is little evidence so far to suggest such effects, and there have continued to be clear signs of underlying disinflation in recent data. Loose labour market conditions, and higher interest rates faced by households and businesses than prior to the conflict, will also act to reduce inflation over time. The Committee judges that the risks to the inflation outlook are tilted to the upside relative to the central projection in the July Monetary Policy Report, but there remains scope for the outlook to change materially as events in the Middle East unfold.
Inflation CPI basis eased to 2.6% in June from 2.8% in May . CPI(g) goods inflation moved to 1.7% from 2.0% prior month. CPI(s.) Service Sector inflation eased to 3.6% from 3.7%. Core inflation eased to 2.5% from 2.6%.
We forecast no changes in base rate for the current year and into 2027.
* 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, at its meeting on 23th July, The Governing Council today decided to keep the three key ECB interest rates unchanged. The outlook for energy prices, while highly volatile, currently stands close to the baseline of the June Eurosystem staff projections and well above the levels recorded prior to the conflict in the Middle East. Uncertainty remains high and the full inflationary impact of the energy shock has yet to play out. The Governing Council is therefore closely monitoring the intensity and duration of the shock, as well as its indirect and second-round effects. The Governing Council is committed to setting monetary policy to ensure that inflation stabilises at its 2% target in the medium term.
In the baseline of the new Eurosystem staff projections, headline inflation is expected to average 3.0% in 2026, 2.3% in 2027 and 2.0% in 2028. For inflation excluding energy and food, the baseline foresees an average of 2.5% in 2026 and 2027 and 2.2% in 2028.
Compared with March, staff have revised up their baseline projection for inflation in 2026 and 2027 owing to a higher path for energy prices, which, to some extent, is expected to feed into food, goods and services inflation.
The baseline sees economic growth at an average of 0.8% in 2026, 1.2% in 2027 and 1.5% in 2028. This is a downward revision for 2026 and 2027, reflecting a more pronounced impact of the war on commodity markets, real incomes and confidence.
Inflation Latest
In the EU inflation eased to 2.9% in June from 3.3% in May. In the Euro area, inflation eased up to 2.9% in July from 2.8% in May.
In Europe, at its meeting on 23th July, The Governing Council today decided to keep the three key ECB interest rates unchanged. The outlook for energy prices, while highly volatile, currently stands close to the baseline of the June Eurosystem staff projections and well above the levels recorded prior to the conflict in the Middle East. Uncertainty remains high and the full inflationary impact of the energy shock has yet to play out. The Governing Council is therefore closely monitoring the intensity and duration of the shock, as well as its indirect and second-round effects. The Governing Council is committed to setting monetary policy to ensure that inflation stabilises at its 2% target in the medium term.
In the baseline of the new Eurosystem staff projections, headline inflation is expected to average 3.0% in 2026, 2.3% in 2027 and 2.0% in 2028. For inflation excluding energy and food, the baseline foresees an average of 2.5% in 2026 and 2027 and 2.2% in 2028.
Compared with March, staff have revised up their baseline projection for inflation in 2026 and 2027 owing to a higher path for energy prices, which, to some extent, is expected to feed into food, goods and services inflation.
The baseline sees economic growth at an average of 0.8% in 2026, 1.2% in 2027 and 1.5% in 2028. This is a downward revision for 2026 and 2027, reflecting a more pronounced impact of the war on commodity markets, real incomes and confidence.
Inflation Latest
In the EU inflation eased to 2.9% in June from 3.3% in May. In the Euro area, inflation eased up to 2.9% in July from 2.8% in May.
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%.
Executive Summary: 2026 Central Bank Outlook (Pre War Outlook)
The 2026 monetary policy landscape is defined by a delicate "normalization" phase. Following the aggressive tightening of previous years, the Federal Reserve (Fed), Bank of England (BoE), and European Central Bank (ECB) are navigating a "higher-for-longer" tail-end while keeping a keen eye on labor market resilience and lingering service-sector inflation. Investors should prepare for heightened volatility around the March and September clusters, which historically serve as pivotal points for shift in policy guidance.
Federal Open Market Committee (FOMC)
The Fed maintains its eight-meeting cadence. Markets are currently dissecting the January 28 hold decision (3.50%–3.75%), with significant focus shifting to the March meeting for a potential "Spring Pivot."
Meeting Date (2026) SignificanceJan 27–28 [Completed] Rates held; leadership transition in focus.
Mar 17–18* Includes Summary of Economic Projections (SEP).
Apr 28–29 Policy recalibration based on Q1 data.
Jun 16–17* Mid-year SEP and "Dot Plot" refresh.
Jul 28–29 Summer liquidity/volatility assessment.
Sep 15–16* Critical Q3 SEP; pre-election window (if applicable).
Oct 27–28 Tactical adjustment meeting.
Dec 8–9* Year-end SEP; 2027 forward guidance.
*Includes a Summary of Economic Projections.
Bank of England: Monetary Policy Committee (MPC)
The BoE entered 2026 with a split vote in February, signaling a "finely balanced" committee. With inflation projected to hit the 2% target by April 2026, the April 30 and July 30 meetings are high-conviction dates for potential rate relief.
Meeting Date (2026)Deliverables
Feb 5 Rate held at 3.75%.
Mar 19 Minutes & Policy Summary.
Apr 30 Monetary Policy Report (MPR).
Jun 18 Minutes & Policy Summary.
July 30 Monetary Policy Report (MPR).
Sep 17 Minutes & Policy Summary.
Nov 5 Monetary Policy Report (MPR).
Dec 17 Year-end Summary.
European Central Bank (ECB)
The ECB’s Governing Council continues its 6-week cycle. Christine Lagarde’s team is balancing a stagnant Eurozone growth outlook against sticky wage growth. Note that the September meeting will be hosted by the Deutsche Bundesbank rather than the usual Frankfurt Eurotower.
Meeting Date (2026)Location / Type
Feb 4–5 [Completed] Frankfurt.
Mar 18–19 Frankfurt (Monetary Policy).
Apr 29–30 Frankfurt (Monetary Policy).
Jun 10–11 Frankfurt (Monetary Policy).
Jul 22–23 Frankfurt (Monetary Policy).
Sep 9–10 Hosted by Deutsche Bundesbank.
Oct 28–29 Frankfurt (Monetary Policy).
Dec 16–17 Frankfurt (Monetary Policy).
The 2026 monetary policy landscape is defined by a delicate "normalization" phase. Following the aggressive tightening of previous years, the Federal Reserve (Fed), Bank of England (BoE), and European Central Bank (ECB) are navigating a "higher-for-longer" tail-end while keeping a keen eye on labor market resilience and lingering service-sector inflation. Investors should prepare for heightened volatility around the March and September clusters, which historically serve as pivotal points for shift in policy guidance.
Federal Open Market Committee (FOMC)
The Fed maintains its eight-meeting cadence. Markets are currently dissecting the January 28 hold decision (3.50%–3.75%), with significant focus shifting to the March meeting for a potential "Spring Pivot."
Meeting Date (2026) SignificanceJan 27–28 [Completed] Rates held; leadership transition in focus.
Mar 17–18* Includes Summary of Economic Projections (SEP).
Apr 28–29 Policy recalibration based on Q1 data.
Jun 16–17* Mid-year SEP and "Dot Plot" refresh.
Jul 28–29 Summer liquidity/volatility assessment.
Sep 15–16* Critical Q3 SEP; pre-election window (if applicable).
Oct 27–28 Tactical adjustment meeting.
Dec 8–9* Year-end SEP; 2027 forward guidance.
*Includes a Summary of Economic Projections.
Bank of England: Monetary Policy Committee (MPC)
The BoE entered 2026 with a split vote in February, signaling a "finely balanced" committee. With inflation projected to hit the 2% target by April 2026, the April 30 and July 30 meetings are high-conviction dates for potential rate relief.
Meeting Date (2026)Deliverables
Feb 5 Rate held at 3.75%.
Mar 19 Minutes & Policy Summary.
Apr 30 Monetary Policy Report (MPR).
Jun 18 Minutes & Policy Summary.
July 30 Monetary Policy Report (MPR).
Sep 17 Minutes & Policy Summary.
Nov 5 Monetary Policy Report (MPR).
Dec 17 Year-end Summary.
European Central Bank (ECB)
The ECB’s Governing Council continues its 6-week cycle. Christine Lagarde’s team is balancing a stagnant Eurozone growth outlook against sticky wage growth. Note that the September meeting will be hosted by the Deutsche Bundesbank rather than the usual Frankfurt Eurotower.
Meeting Date (2026)Location / Type
Feb 4–5 [Completed] Frankfurt.
Mar 18–19 Frankfurt (Monetary Policy).
Apr 29–30 Frankfurt (Monetary Policy).
Jun 10–11 Frankfurt (Monetary Policy).
Jul 22–23 Frankfurt (Monetary Policy).
Sep 9–10 Hosted by Deutsche Bundesbank.
Oct 28–29 Frankfurt (Monetary Policy).
Dec 16–17 Frankfurt (Monetary Policy).
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.
