Are we expecting BOE to remain at 4.75% on 8th February 2025?

IAMIAM

I was surprised 

lojo1000

US CPI and UK wages both above expectations today. UK CPI tomorrow.

Current 2y gilt yields below are not pointing toward settling at the yields post GFC below 2% but more like the pre-GFC yields of over 4%.

Hoenir

Nothing as yet to suggest any significant change in policy for at least 3 months. Intital signs that the lag with which interest rate changes (also QT which quietly chugs away in the background) impacts the real economy is beginning to filter through. 

Gilt yields below 2% are little more than a distant memory now. 

Strummer22

The key tomorrow is not whether inflation rises or not - base effects (i.e. a steep negative figure from Jan 23 dropping out) always meant a rise was possible this month. It's whether the actual number comes in higher than the expectation of about 4.0 - 4.2%.

Hoenir

Strummer22 said:

The key tomorrow is not whether inflation rises or not - base effects (i.e. a steep negative figure from Jan 23 dropping out) always meant a rise was possible this month. It's whether the actual number comes in higher than the expectation of about 4.0 - 4.2%.

Benefit rises and the annual increase in NMW will start to kick in around 2 months time. The BOE is going to want to see hard data first. Strong US inflation data released today does nothing to aid a broader reduction in global interest rates. 

Strummer22

Headline rate 4% and core inflation 5.1%, both unchanged from last month (although the month on month figures are both steeply downwards). There’s no doubt in my mind that these are both well below BoE’s expectations. 

I now expect headline inflation to fall below 2% in March (so the figures released in April), and if not then, it will be a month later. That’s 1-2 months earlier than I thought around November time - and at that time BoE was forecasting we wouldn’t get there at all in 2024. They now think we will, albeit briefly, whereas I think inflation may even briefly turn negative!

 Edit: oh yeah and first cut in May

RelievedSheff

With todays inflation figures then there is no need for any change in BOE interest rate in March.

Inflation will drop sharply in April when energy prices drop again.

Strummer22

RelievedSheff said:

With today’s inflation figures then there is no need for any change in BOE interest rate in March.

Given the huge lag in the effect of monetary policy changes, I disagree. BoE shut the door after the horse had bolted when rates needed to go up, and look set to make the same mistake again on the way down.

lojo1000

Unless unemployment rises and employment falls, I cannot see the BoE cutting rates if their forecast is for inflation to rise again in 2025.

Further an added economic stimulus which works against a rate cut is that no government ever looks like they want anything other than to run a budget deficit. And the mad thing is, employment is so high and the country still needs to run deficits (an issue created by all the economic stimulus of prior years/decades).

With employment as strong as it is and wages as strong as they are above CPI target, cutting rates gives the wrong signal to business and consumer to over-extend. If they needed to raise rates in 2025 this would be too painful and would knock confidence.

BoE and monetary policy is not something you can fine-tune and fiddle with (given its lags). They should not (and I don't think will) cut rates in 2024 only to have to raise again in 2025 - unless the employment market cracks in which case it's all bets off.

Long term (post 2025), I see inflation <2% and employment falling and BoE needing to cut hard.

Strummer22

lojo1000 said:

Unless unemployment rises and employment falls, I cannot see the BoE cutting rates if their forecast is for inflation to rise again in 2025.

Further an added economic stimulus which works against a rate cut is that no government ever looks like they want anything other than to run a budget deficit. And the mad thing is, employment is so high and the country still needs to run deficits (an issue created by all the economic stimulus of prior years/decades).

With employment as strong as it is and wages as strong as they are above CPI target, cutting rates gives the wrong signal to business and consumer to over-extend. If they needed to raise rates in 2025 this would be too painful and would knock confidence.

BoE and monetary policy is not something you can fine-tune and fiddle with (given its lags). They should not (and I don't think will) cut rates in 2024 only to have to raise again in 2025 - unless the employment market cracks in which case it's all bets off.

Long term (post 2025), I see inflation <2% and employment falling and BoE needing to cut hard.

From the BoE themselves (https://www.bankofengland.co.uk/explainers/will-inflation-in-the-uk-keep-rising):

“It’s usually thought that changes in interest rates have their maximum effect on inflation after around 18 months to two years.”

If you want your monetary policy to influence things in the right direction post 2025 you need to be thinking about the changes needed to the interest rate now.