© Neil Mellor
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I believe it is not so much the underlying economy and its performance that is important; it is rather the housing sector. I expect that the economy will continue to move forward and I see a fairly positive scenario in the next couple of years. However, what may be the major influence on the BoE policy is the housing sector. This country has a long history of destabilizing trends in property prices, and, as a direct result of the 2008 financial crisis, interest rates are at a setting where they are not conducive to longer term stability. In the South East of the country, in particular, prices are rising very rapidly and this is starting to feed through to the rest of the country. Clearly, the Bank of England would prefer not to raise interest rates too early in the cycle but ultimately there might be a situation where they do not have any choice. I do think interest rates will probably rise a little sooner than people think.
Many experts suggest that the Bank of England could raise its interest rates before the U.S. as the British currency has gained 7% since April and the unemployment rate has declined just recently. What are your thoughts on this matter?
I think that, on the basis of what I have just explained about the housing sector, we are more likely to see a rate increase in this country before the U.S. That is contentious, however and I note one MPC member thinks that the U.S. is at a more advanced phase of its cycle. Personally I think that the main reason this was said is that the policy makers are keen for Sterling to ease off a little bit. The nation's currency has risen 8% and that will not do the country's exports any good at all at a time when we still have a fiscal squeeze. Perhaps the biggest risk factor for the UK recovery comes from the export sector, but, apart from that, assuming that Sterling does not continue to appreciate as it has, I assume there is a very strong chance that the UK will see a rate hike sooner than the U.S.
What performance do you expect from the British Pound versus its major counterparts during the fourth quarter?
I expect GBP/USD to continue advancing. To my mind, there will be some resistance just above current levels, because we saw the peak in this currency pair in 2012 at around 1.63. Thus, in my opinion, we are approaching levels where we might get some consolidation. I think there is a potential for a rise to 1.70, and I expect that Cable will be well on the way to that by the end of the year. There is a similar situation against the Euro, as economic cycles are totally mismatched; therefore, I think the Euro could seriously fall versus the Pound.