© Neil Mellor
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I do not have any strong thoughts on the second quarter GDP estimate; at the same time I think the UK is in a relatively favorable position. As we look on things from the currency perspective, is it is the relative growth rate what matters the most. The UK economy is slightly imbalanced at the moment and we would prefer a lot stronger investment, and ultimately I think it will slow down in the Q2, but not to the point where it should overly concern the Bank of England. It might not stay that way, but as to where things stand now, the trend seems fairly reasonable.
Recently, the Bank of England announced they are keeping the rates at the same level, even though a lot of economists were saying that rate hiking is imminent at the moment. Do you believe that keeping rates on hold is the best medicine for the economy at the moment?
Absolutely, I have not been sharing the view that rates should be hiked imminently. I believe that, if anything, there still is a degree of optimism in regards to the UK rate profile. Time and time again, Governor Mark Carney has revised back the projections of implicit and assumed basis for rate hikes. However, I think the big fear about raising the interest rates is that it could find the general UK households with budgets which are near the zero rate thresholds. In other words, the rate hike will inevitably do some damage, and the UK has to be in a good position to absorb that.
Therefore, I think the BoE is still venturing into the unknown path and sort of feeling its way in this particular situation. I believe the Bank of England only knows when rates are going higher when we are a couple or so months out. Hence, it is still probably more likely to happen in the first quarter of next year, but that is nevertheless rather a guess than a statement.
Data also point to an upturn in inflationary pressures which should alleviate worries about deflation becoming entrenched. Do you suggest that the return of rising prices could hinder consumer spending later this year?
I am not sure if the CPI has such a big influence in this particular case.I believe the employment figures are a more serious driver rather than the income growth, which is yet to fully recover. I cannot deny that in the long term, inflation will obviously impact spending. However, on a short-term basis the influence is quite insignificant.
What will be the major headwinds for the Pound until the end of this year and what are your forecasts for EUR/GBP and GBP/USD for the same period?
The key gauge for the Bank of England is following the data coming out. We have the UK referendum on the EU membership coming on the horizon; hence, these and any other major global news will impact the Sterling behavior. As concerns the EUR/GBP, our 12 month forecast is at around 0.70 markers, which is not a huge move from the current levels. For the GBP/USD, we see the pair going a little lower as well, down to around 1.50 by the end of the year.