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I do not think there will be any interest rate hikes until the year after. I think that part of the problem is that much of the high inflation is due to the inefficiency in the U.K. economy, which is quite acute. The supply side of the economy is very poor, productivity has been dreadful in the recent years and there is a huge trade deficit as well. Thus, the U.K. economy is struggling on the competitive basis – it needs productivity growth and enhanced supply side. The last thing the U.K. economy needs is higher interest rates, as it is too early for the rate tightening cycle to start. Therefore, the interest rate hikes may begin not earlier than 2015.
Currently the U.K. economy is performing quite well, yet considering the situation with the housing bubble is there a potential threat that it will derail the current economic growth?
Actually, we do not accept that there is a housing bubble. We think that it has been a short squeeze in house prices, because there has not been enough supply of homes for a couple of decades and it has really come to a trigger level at the moment. We believe that it is just a distortion or disequilibrium. In order to balance it, there should be much more housing supply and that is going to take several years. Thus, there could be higher house prices for the next year or two, but there is a significant limit to the short squeeze. It is not a long term demand led phenomena; it is more a disequilibrium between supply and demand in the housing market. However, we do not think that the housing market will undermine the recovery; it will actually be one of the drivers of the economic growth.
What performance do you expect from the Pound in the first quarter of 2014 and what trend do you see in the Sterling throughout next year?
We believe that the Pound is going to face a very changeable year during the first half, seeing the Sterling performing weaker against key currencies, such as the U.S. Dollar and Euro. However, the Pound will strengthen later on in the year and become one of the strongest performers. Thus, we expect the cable to drop, possibly as low as around 1.53-1.54 during the first half of 2014. Afterwards, we see the Pound rallying back towards 1.60 and above later on in the year. We suggest the U.K. currency may continue to appreciate in 2015. Hence, we predict a medium-term bull run for the Sterling against the U.S. Dollar, but only in the second half of 2014.