As the Bank of England and the Fed are scheduled for their monetary policy meetings. Tried to forecast BoE Sterling money market data with interesting statistical results. Bank of England set interest rate 1.75%, excel forecast Sterling interest rate equilibrium 2.25%, 50 basis points hike from where we are now. Important to discern these data do not incorporate exogenous factors such as inflation & macroeconomic data.
Anyhow other data to consider: interest rate variance of 3.10% that sees 2.25% with an additional 3.10% variance= 5.35% interest rate forecast, incorporated in the data. Similar, interest rate volatility =2.35% which would see a Sterling money market Interest rate of 4.6%. The statistical data of variance and volatility are there to factor in the monetary policy framework that had been set above or below the neutral rate of 2.0%<2.5%, in order to respond to exogenous macroeconomic factors variances and shocks. Considering actual UK Core inflation 6.3% and CPI inflation 9.9%, could become plausible to forecast the Bank of England having to respond to high inflation with hikes up to 4.6% | 5.3% range, although these would see Sterling money market real interest rate being negative still. Monetary policy would necessarily need global assets and commodities prices to decrease even more than what has been priced by stock market financial institutions and investors’ expectations. Although the Bank of England has to confront the Sterling exchange rate depreciation. That could see the Bank of England taking a bold decision to get in front of the Fed by setting SONIA’s interest rate higher than EFFR. will the Bank of England contemplate such as chessboard move?
SONIA Forward Curves
SONIA SHORT-TERM INTEREST RATE
SONIA SWAPS CURVE