© Robert Wood
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The BoE's inflation report will have to slash the forecasts over the next year, because oil prices are falling very sharply. The Bank may forecast a negative rate in one or two month through this year, but certainly will have to lower the rate a lot, probably even below 0.5%. Currently the damage is obviously a follow-up from slumping oil prices. However, what is much more interesting is whether they raise or lower the medium-term inflation forecasts. I expect the BoE to raise forecasts a little bit, as oil provides a stimulus for growth and business service remains strong, whereas, market interest rates have come down over the past three months. Moreover, all that adds up to strong growth in the UK economy, where the unemployment continues to fall. On that basis, markets may look at the next year's forecast and think the inflation report is very dovish. Yet, I see a more important signal from their forecast two- three years ahead, which should be moderately hawkish.
The UK's share of total exports for Eurozone's markets is currently hovering near 48%, a two-year high. How do you evaluate the UK sensitivity to Eurozone's latest headwinds and how does it weight on the Sterling?
First of all, Greece is a risk to the UK - no one could say with a real certainty, what a Greek exit from the Eurozone would mean. We give a 35% chance of such possibility with a significant risk of it, which could have negative consequences. That being said, the UK is much better insulated from any potential term more than it was in 2011 and 2012. The government is not really engaged in any powerful austerity this year. In addition, consumers are seeing real wage increases for the first time, rather than being squeezed by high inflation.
What is most important is that the contagion controls within the Eurozone are much stronger than they were two years ago. The ECB is or will be buying a lot of bonds anyway, whereas the ESM has funds to end outright monetary transactions and the Outright Monetary Transactions could help as well. In conclusion, those things make me believe that Greece would not pose such a risk to the UK. As regards the rest of the EU macro economy, that could well be turning up now as the ECB's Quantitative Easing help with picking up.
Where do you foresee EUR/GBP and GBP/USD for the first quarter of 2015?
For the GBP/USD I am looking for a little appreciation from where it is now, due to the fact that markets have gone too far in pushing back the first BoE interest rate hike. For the Euro, of course, is much more to do with what happens in Greece than with the UK. Therefore, I assume if the Greek problem gets partially resolved over the next couple of months, the Sterling may fall back a little against the Eurozone currency.