Friday Forward Guidance ...
This is our Friday Forward Guidance for Friday7th Febuary 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 4 February 2026, the Monetary Policy Committee voted by a majority of 5–4 to maintain Bank Rate at 3.75%. Four members voted to reduce Bank Rate by 0.25 percentage points, to 3.5%. On the basis of the current evidence, Bank Rate is likely to be reduced further.
In the U.S, in the latest move, at its meeting ending on 29th January2026, "Available indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained low, and the unemployment rate has shown some signs of stabilization. Inflation remains somewhat elevated.The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate.
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 3‑1/2 to 3‑3/4 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective."
In Europe, at its meeting on 5th February, The Governing Council today decided to keep the three key ECB interest rates unchanged. Its updated assessment reconfirms that inflation should stabilise at the 2% target in the medium term. The interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will remain unchanged at 2.00%, 2.15% and 2.40% respectively.
At its meeting ending on 4 February 2026, the Monetary Policy Committee voted by a majority of 5–4 to maintain Bank Rate at 3.75%. Four members voted to reduce Bank Rate by 0.25 percentage points, to 3.5%. On the basis of the current evidence, Bank Rate is likely to be reduced further.
In the U.S, in the latest move, at its meeting ending on 29th January2026, "Available indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained low, and the unemployment rate has shown some signs of stabilization. Inflation remains somewhat elevated.The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate.
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 3‑1/2 to 3‑3/4 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective."
In Europe, at its meeting on 5th February, The Governing Council today decided to keep the three key ECB interest rates unchanged. Its updated assessment reconfirms that inflation should stabilise at the 2% target in the medium term. The interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will remain unchanged at 2.00%, 2.15% and 2.40% respectively.
Fed Funds Rate ...
In the U.S, in the latest move, at its meeting ending on 29th January 2026, "Available indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained low, and the unemployment rate has shown some signs of stabilization. Inflation remains somewhat elevated.The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate.
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 3‑1/2 to 3‑3/4 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective."
"Futures are still pricing in two cuts for the full year, but it’s questionable whether that is a fair bet. The available workforce is smaller than it used to be, thanks to demographics. The ratio of those in employment to the entire population is unimpressive. For all practical purposes, the US appears to be close to full employment" John Authers Bloomberg feebrury 12th 2026
Inflation CPI held at 2.7% in December from 2.7% in November. The underlying rate (excluding food and energy costs) was 3.0%.
The Fed has upgraded the forecast of growth in the current year 2025 to 1.6% from 1.4% in June, Growth in 2026 has also been upgraded to 1.8% from 1.6%. The growth forecast for 2027 is upgraded to 1.9% from 1.8%. TWe expect growth of 2.2% in 2025 down from 2.8% in 2024
The Summary of Economic Projections, suggested the Fed Funds rate will average around 3.6% 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 4.1% this week.
Our model rate is around the 4.00% -4.50% level. .
In the U.S, in the latest move, at its meeting ending on 29th January 2026, "Available indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained low, and the unemployment rate has shown some signs of stabilization. Inflation remains somewhat elevated.The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate.
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 3‑1/2 to 3‑3/4 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective."
"Futures are still pricing in two cuts for the full year, but it’s questionable whether that is a fair bet. The available workforce is smaller than it used to be, thanks to demographics. The ratio of those in employment to the entire population is unimpressive. For all practical purposes, the US appears to be close to full employment" John Authers Bloomberg feebrury 12th 2026
Inflation CPI held at 2.7% in December from 2.7% in November. The underlying rate (excluding food and energy costs) was 3.0%.
The Fed has upgraded the forecast of growth in the current year 2025 to 1.6% from 1.4% in June, Growth in 2026 has also been upgraded to 1.8% from 1.6%. The growth forecast for 2027 is upgraded to 1.9% from 1.8%. TWe expect growth of 2.2% in 2025 down from 2.8% in 2024
The Summary of Economic Projections, suggested the Fed Funds rate will average around 3.6% 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 4.1% this week.
Our model rate is around the 4.00% -4.50% level. .
Bank Base Rate ...
At its meeting ending on 4 February 2026, the Monetary Policy Committee voted by a majority of 5–4 to maintain Bank Rate at 3.75%. Four members voted to reduce Bank Rate by 0.25 percentage points, to 3.5%. On the basis of the current evidence, Bank Rate is likely to be reduced further.
Monetary policy is being set to ensure CPI inflation settles sustainably at 2% in the medium term, which involves balancing the risks around achieving this. The risk from greater inflation persistence has become somewhat less pronounced since the previous meeting, while the risk to medium-term inflation from weaker demand remains.
The extent of further easing in monetary policy will depend on the evolution of the outlook for inflation. The restrictiveness of policy has fallen as Bank Rate has been reduced by 150 basis points since August 2024. On the basis of the current evidence, Bank Rate is likely to continue on a gradual downward path. But judgements around further policy easing will become a closer call.
Inflation CPI basis increased to at 3.4% in December from 3.2% in November . CPI(g) goods inflation moved to 2.2% from 2.1% prior month. CPI(s.) Service Sector inflation eased to 4.5% from 4.4%. Core inflation held at 3.4% from 3.4%.
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 4.00% in Q4 2025 but not much more to follow in 2026. Weak growth has led to expectations of one further cut this year, ending the year at 3.50% but the rise in inflation may offset the urge to cut. The Bank now expects Bank rate to end the year at 3.25%, rising to 3.50% in the first quarter of 2028
Ten year gilt rates trade at at 4.5% this week. Thirty years at 5.3%
* 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 5th February, The Governing Council decided to keep the three key ECB interest rates unchanged. Its updated assessment reconfirms that inflation should stabilise at the 2% target in the medium term. The interest rates on the deposit facility, the main refinancing operations and the marginal lending facility remain unchanged at 2.00%, 2.15% and 2.40% respectively.
Official figures showed that inflation in the Euro Area declined to 1.7 per cent in January, from 2.0 per cent in December and 2.1 per cent in November..
The new Eurosystem staff projections show headline inflation averaging 2.1% in 2025, 1.9% in 2026, 1.8% in 2027 and 2.0% in 2028. For inflation excluding energy and food, staff project an average of 2.4% in 2025, 2.2% in 2026, 1.9% in 2027 and 2.0% in 2028.
Inflation has been revised up for 2026, mainly because staff now expect services inflation to decline more slowly. Economic growth is expected to be stronger than in the September projections, driven especially by domestic demand. Growth has been revised up to 1.4% in 2025, 1.2% in 2026 and 1.4% in 2027 and is expected to remain at 1.4% in 2028.
In Europe, at its meeting on 5th February, The Governing Council decided to keep the three key ECB interest rates unchanged. Its updated assessment reconfirms that inflation should stabilise at the 2% target in the medium term. The interest rates on the deposit facility, the main refinancing operations and the marginal lending facility remain unchanged at 2.00%, 2.15% and 2.40% respectively.
Official figures showed that inflation in the Euro Area declined to 1.7 per cent in January, from 2.0 per cent in December and 2.1 per cent in November..
The new Eurosystem staff projections show headline inflation averaging 2.1% in 2025, 1.9% in 2026, 1.8% in 2027 and 2.0% in 2028. For inflation excluding energy and food, staff project an average of 2.4% in 2025, 2.2% in 2026, 1.9% in 2027 and 2.0% in 2028.
Inflation has been revised up for 2026, mainly because staff now expect services inflation to decline more slowly. Economic growth is expected to be stronger than in the September projections, driven especially by domestic demand. Growth has been revised up to 1.4% in 2025, 1.2% in 2026 and 1.4% in 2027 and is expected to remain at 1.4% in 2028.
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.
