Friday Forward Guidance ...
This is our Friday Forward Guidance for Friday 7th November. 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 November 2025, the Monetary Policy Committee voted by a majority of 5–4 to maintain Bank Rate at 4%. Four members voted to reduce Bank Rate by 0.25 percentage points, to 3.75%.
In the U.S, At its meeting ending on 29 October 2025. In support of its goals and in light of the shift in the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 4 to 4-1/4 percent. In considering 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.
In Europe, at its meeting on 30th October, The Governing Council decided to keep the three key ECB interest rates unchanged. Inflation is currently at around the 2% medium-term target and the Governing Council’s assessment of the inflation outlook is broadly unchanged.
At its meeting ending on 5 November 2025, the Monetary Policy Committee voted by a majority of 5–4 to maintain Bank Rate at 4%. Four members voted to reduce Bank Rate by 0.25 percentage points, to 3.75%.
In the U.S, At its meeting ending on 29 October 2025. In support of its goals and in light of the shift in the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 4 to 4-1/4 percent. In considering 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.
In Europe, at its meeting on 30th October, The Governing Council decided to keep the three key ECB interest rates unchanged. Inflation is currently at around the 2% medium-term target and the Governing Council’s assessment of the inflation outlook is broadly unchanged.
Fed Funds Rate ...
In the latest move, at its meeting ending on 29th October 2025, "Available indicators suggest that economic activity has been expanding at a moderate pace. Job gains have slowed this year, and the unemployment rate has edged up but remained low through August; more recent indicators are consistent with these developments. Inflation has moved up since earlier in the year and 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 and judges that downside risks to employment rose in recent months.
In support of its goals and in light of the shift in the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 3-3/4 to 4 percent. In considering 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 decided to conclude the reduction of its aggregate securities holdings on December 1. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Inflation CPI increased to 3.0% in September from 2.9% in August. 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%. The latest BEA data suggests growth in the first half was 2.0% year on year basis. Growth was distorted by higher levels on imports in Q1 and a drop in imports and investment in Q2.
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 latest move, at its meeting ending on 29th October 2025, "Available indicators suggest that economic activity has been expanding at a moderate pace. Job gains have slowed this year, and the unemployment rate has edged up but remained low through August; more recent indicators are consistent with these developments. Inflation has moved up since earlier in the year and 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 and judges that downside risks to employment rose in recent months.
In support of its goals and in light of the shift in the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 3-3/4 to 4 percent. In considering 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 decided to conclude the reduction of its aggregate securities holdings on December 1. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Inflation CPI increased to 3.0% in September from 2.9% in August. 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%. The latest BEA data suggests growth in the first half was 2.0% year on year basis. Growth was distorted by higher levels on imports in Q1 and a drop in imports and investment in Q2.
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 5 November 2025, the Monetary Policy Committee voted by a majority of 5–4 to maintain Bank Rate at 4%. Four members voted to reduce Bank Rate by 0.25 percentage points, to 3.75%.
CPI inflation is judged to have peaked. Progress on underlying disinflation continues, supported by the still restrictive stance of monetary policy. This is reflected in an easing of pay growth and services price inflation. Underlying disinflation is being underpinned by subdued economic growth and building slack in the labour market.
Monetary policy is being set to balance the risks around meeting the 2% inflation target sustainably. The risk from greater inflation persistence has become less pronounced recently, and the risk to medium-term inflation from weaker demand more apparent, such that overall the risks are now more balanced. But more evidence is needed on both.
The restrictiveness of monetary policy has fallen as Bank Rate has been reduced. The extent of further reductions will therefore depend on the evolution of the outlook for inflation. If progress on disinflation continues, Bank Rate is likely to continue on a gradual downward path.
Inflation CPI basis steady at 3.8% in September (3.8% in July and August . CPI(g) goods inflation moved to 2.9% from 2.8% prior month. CPI(s.) Service Sector inflation held at 4.7% unchanged. Core inflation eased to 3.5% from 3.6%.
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 3.75% but the rise in inflation may offset the urge to cut.
Ten year gilt rates trade at at 4.44% this week. Thirty years at 5.2%
* 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 11th September, The Governing Council today decided to keep the three key ECB interest rates unchanged. Inflation remains close to the 2% medium-term target and the Governing Council’s assessment of the inflation outlook is broadly unchanged. The economy has continued to grow despite the challenging global environment. The robust labour market, solid private sector balance sheets and the Governing Council’s past interest rate cuts remain important sources of resilience. However, the outlook is still uncertain, owing particularly to ongoing global trade disputes and geopolitical tensions.
Official figures showed that inflation in the Euro Area moved to 2.1 per cent in October from 2.2 per cent in September. Inflation in the European Union increased to 2.6% in September from 2.4% in August.
Staff expect inflation in the Euro area excluding energy and food to average 2.4% in 2025 and 1.9% in 2026 and 2027, broadly unchanged since March.
Growth in the EU eased to 1.5% in the third quarter from 1.6% in Q2 and 1.7% in Q1. Growth in the Euro Area eased to 1.3% in the third quarter from 1.5% in Q2 and 1.7% in Q1. Data year on year basis.
In Europe, at its meeting on 11th September, The Governing Council today decided to keep the three key ECB interest rates unchanged. Inflation remains close to the 2% medium-term target and the Governing Council’s assessment of the inflation outlook is broadly unchanged. The economy has continued to grow despite the challenging global environment. The robust labour market, solid private sector balance sheets and the Governing Council’s past interest rate cuts remain important sources of resilience. However, the outlook is still uncertain, owing particularly to ongoing global trade disputes and geopolitical tensions.
Official figures showed that inflation in the Euro Area moved to 2.1 per cent in October from 2.2 per cent in September. Inflation in the European Union increased to 2.6% in September from 2.4% in August.
Staff expect inflation in the Euro area excluding energy and food to average 2.4% in 2025 and 1.9% in 2026 and 2027, broadly unchanged since March.
Growth in the EU eased to 1.5% in the third quarter from 1.6% in Q2 and 1.7% in Q1. Growth in the Euro Area eased to 1.3% in the third quarter from 1.5% in Q2 and 1.7% in Q1. Data year on year basis.
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.
