How low is the UK interest rate?

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British government bond yields have begun year -round volatility. After about 0.3 percentage points over the five -year Gild after the first two weeks rose, they now return to the place. Although there is noise in fiscal policy, this movement is mostly led by global factors. US bond yields also showed similar volatility.

The UK debt market can be more sensitive to financial reliability for turbulence after the 2022 LIZ Truss budget. However, the UK's fiscal sustainability is not much different from some colleagues, including France, which has a high fiscal deficit and a rapid increase in debt.

But the UK remains unusual on the other side of the policy director. The UK's policy rate is the highest among large developed countries. It is weighed on the activity. Since summer, economic growth has stagnated and labor demand has dropped sharply. Inflation was alleviated last year and earned 2 points near the 2 %BOES goal. Therefore, it is not surprising that the December meeting repeated the intention of lowering the policy rate.

But how low will it go? Unlike many other central banks, the BOE did not provide clear guidance. Monetary policies are tight or loose equilibrium ratios require a lot of humility. It changes naturally over time, depending on the factors that affect the supply and demand of capital.

The simple way to estimate it is to see economic growth. High growth countries are attracting more investment and reducing savings, raising savings and increasing interest rates. According to this measure, the market seems to have a high interest rate in the UK. Since the beginning of the infectious disease, productivity has increased only 0.5 % (annual), slightly lower than the proportion of infectious diseases, and in the United States, actual productivity can be much lower after less than a third. Perhaps it is to underestimate employment levels.

Inflation also increases pressure on interest rates. Last year, the UK's core inflation was slightly higher than most other developed countries over the past year, but the trend has fallen. The default price pressure, except for a one -time tax shock, is especially alleviated in the service. Depending on the expectation of mid -term inflation, the reliability of the central bank is not damaged, and there is little reason why the UK has a higher structural inflation than other countries.

However, the market remains skeptical and expects to cut several times with a final destination of about 4 %. This outlook can reflect concerns that inflation can increase if government spending increases. The market can question the government's promise to the government's new fiscal rules, considering the recent history of coordination. Like Italy, unlike most other large -scale developed countries, the UK borrows money with a much higher interest rate than the basic economic growth rate to exacerbate debt mechanics.

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We have a central view of inflation even if we admit that fiscal policy adds uncertainty. Despite the increase in government spending, taxes will also increase taxes, leaving firm policy. As you can see from the recent survey, the net effect is probably attracted to activities and employment. Companies can deliver some of the national insurance hikes to consumers, but this will be the same price -level adjustment, such as value -added tax or tariff increase. In general, it is what the central bank sees. And we will be surprised if the government has not adjusted taxation or expenditures to meet fiscal rules, considering the recent volatility.

Therefore, we expect the British gold leaf production to decrease. The five -year gold leaf yield is slightly lower than the current US, and we expect to fall below the US level over time, similar to five years before the infectious disease. In recent months, short -term inflation expectations are higher, while the rate of decrease in the rate is higher as global trade uncertainty, town fiscal policy, and generally soft growth prospects increase.

As for the policy ratio, our internal model refers to a neutral interest rate of 2-3 %in the UK. Even if the BOE pays attention to the interest rate cut in the first half of this year, we have room for more interest rates than the market expects. The BOE can eventually follow other central banks, including the European Central Bank, the Canadian Bank, the New Zealand Reserve Bank and the faster reduction, including RIKSBANK.

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