© Adam Cole
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The CBI has predicted a slowdown of UK economic growth on the back of "weak productivity and wage growth". However, the industry body said the growth will remain "solid" amid market volatility and slower growth globally, maintaining its position as one of the fastest-growing advanced economies in the world. Do you agree with this statement? What are your expectations regarding the UK economic growth?
We would broadly agree with that, as the UK cycle matures, growth is slowing towards its long term sustainable level of around 2%. Moreover, indicators we have seen recently are consistent with that. The growth spot that we had in the early stages of the recovery is now heading to something more. Growth is solid, and I believe that is a reasonable characterization of that, but not spectacular.
BoE Deputy Governor Jon Cunliffe said that Britain is unlikely to join the EU's banking union, which is centred on the Euro zone, as it is not needed for being part of the wider EU single market. He also said deepening Euro zone integration would not reduce Britain's role in EU financial supervision given it is Europe's biggest financial centre. What is the most likely outcome of this situation? What future do you predict for the UK in the context of euro integration?
Our central assumption would be that the referendum, if it is held on UK membership, will in the end be fairly clear vote to stay, and in that sense the UK's position as the major financial centre would not be challenged. If we are wrong on that, then there is a material risk at the case. Then I believe we have to say that it would challenge the UK's position as well as several other negative transmission mechanisms, and that would be a negative factor for one of the engines of UK growth. Thus, I suppose from that perspective there would be a negative background for the economy and the currency.
What other factors will influence the performance of the Pound this year? And what are your forecasts for GBP/USD and EUR/GBP for the Q1 of 2016 and in a longer term?
I would distinguish 3 major factors. The first is the prospects of the UK economy and what that means for the UK interest rates. In that respect, we think the market is a little too gloomy at the moment and that the risks of rate cuts are smaller than the market is priced for. Secondly, I would say that it is a prospect for the EU referendum and, thirdly, the general risk background. The Sterling particularly against the Euro tends to be heated when markets are in risk averse mode.
Taking all these factors together with the central expectations, in the positive scenario, we think EUR/GBP can trade back down towards 70 in a longer term, but with the short term volatility before the currency establish itself. Talking about the Sterling against the US Dollar, we have it broadly flat. I believe that because we have a positive scenario for both the Dollar and the Sterling, between 1.40-1.50, that is a little bit over the range trade going forward from here.