© Ross Walker
|
We do think UK inflation is going to rise quite sharply at the end of this year and then through most of 2017. It is mainly a consequence of the Sterling's sharp fall around 10% on a trade-weighted basis, which will boost the CPI inflation by over 1.5%, as we expect.
Hence, we have a relatively sharp rise of inflation in our forecasts: we anticipate it to peak around 2.5-2.75% in late 2017 and then begin to turn down. As we expect a relatively subdued economic backdrop as the UK's EU exit process takes place, we see inflation falling back to a little bit below its target in 2 to 3 years' time.
Some analysts say that if things get worse than expected, the Bank of England may simply be forced to cut its key interest rate into the negative territory. In your point of view, how likely is the UK to see negative rates this year?
I think it is very unlikely this year; however, I believe we will see another interest rate cut in November: 15 or 20 basis points reduction. Most probably, in the early pass of 2017, it is perfectly possible that we see an extension of the QE Gilt purchases, perhaps alongside a looser fiscal policy announced by the government. If at that point the economy is still struggling, if we have a very weak economic growth, if inflation is expected to fall further below target, it is possible that the Bank of England would again review its stance on negative rates and possibly cut rates into negative territory. Nevertheless, for 2016 or 2017 I would put a very low probability on negative rates, certainly less than a 5% probability.
What factors will influence the performance of the Pound this year? What are your forecasts for GBP/USD and EUR/GBP for the same period?
The first thing would be the economic growth outlook. We think the UK is going to see a material slowdown as soon as the third quarter's numbers come out at the end of October. For 2017, we have growth of just 0.6% for the UK economy, so that would be the weakest reading since the financial crisis; not as bad as what we saw during the financial crisis but some significant deterioration and further monetary policy accommodation. To my mind, that means that even from these low levels we would expect to see the Pound fall further. Thus, in terms of the US Dollar, I think we are looking at mid to high, 1.20-1.27, as a low.
We also think the Pound will lose some further ground against the Euro, although further ECB policy easing and then key elections next year in France, the Netherlands and Germany might limit any Euro gains. In a short-term, the GBP/EUR could fall quite easily to 1.15, maybe even 1.14 against the Euro.