Bond Watch: Bank of England reveals new 2024 inflation forecasts

Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.     

Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.     

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Here’s what you need to know this week. 

Bank of England keeps rates at 5.25% 

For the fourth consecutive meeting, the Bank of England yesterday held interest rates at 5.25%.  

Governor Andrew Bailey said more evidence was needed that inflation is set to fall all the way to the 2% target, and will stay there, before it lowers interest rates. 

The move was anticipated by investors, with bond yields relatively flat following the decision.  

The Bank of England also added some colour on inflation expectations this year. It said that price rises could fall to its 2% target within a few months, before rising slightly again.  

It expects the inflation rate to be 2.75% by the end of 2024, “but there could be some bumps along the way between now and then”. 

Lower oil and gas prices could mean that inflation temporarily drops to 2% for a brief period, only to rise later in the year, according to the Bank of England.  

“We can’t rule out another global shock that keeps inflation high though,” it said.  

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No change to US interest rates either  

Federal Reserve boss Jerome Powell also decided to leave interest rates unchanged this week, at between 5.25% and 5.5%. 

Powell also signalled that rates would not be cut next month, which goes against the expectations of many investors.  

The US economy is strong, with real GDP growth increasing 3.3% year-on-year in the final quarter of 2023. With inflation falling and now at 3.4%, the US central bank is not feeling pressure yet to cut rates to stimulate the economy.  

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Anna Stupnytska, economist at fund group Fidelity International, said Powell emphasised that the Federal Reserve remains data dependent and is not declaring victory over inflation just yet and March is not a likely start to the cutting cycle. 

She adds: “We believe it will take a bit longer for the Federal Reserve to accumulate more evidence on inflation and get more clarity on how monetary policy transmission works its way through to the economy.  

“This rules out an early start to the cutting cycle, which is consistent with Powell's comment on March not being the base case. Given stickiness in some components of inflation, we view inflation risks as still skewed to the upside in the coming months, especially against the backdrop of a strong economy.”