13 May 2015
BoE expected to hike rates in November, EUR/GBP 6M target at 0.69 – Danske
FXStreet (Barcelona) - Analysts at Danske Bank, review the Bank of England’s Quarterly Inflation Report and maintain their November rate hike outlook, and further target EUR/GBP at 0.69 over 6 months.
Key Quotes
“The BoE increased its inflation projection for 2015 slightly to 0.6% but lowered its projection for next year to 1.6%. The higher oil prices could lead to higher inflation in H2 15 than it previously anticipated while the stronger GBP continues to put downward pressure on inflation.”
“That said, the projection still indicates that inflation will rise above the 2% target in Q3 17. Hence the medium-term inflation outlook, in our view, still calls for a hike later this year.”
“Governor Mark Carney reiterated that the bank will look through one-off effects on inflation as the BoE recognises that monetary policy works with a lag.”
“The BoE also lowered its projected path for the unemployment rate and now expects unemployment to reach its estimated long-term equilibrium rate of 5.0% in Q1 17. Bank staff estimate that slack is broadly in the region of 0.5% of GDP, which is in line with the February report.”
“The Bank has also lowered its forecasts for GDP growth for the coming years. It now expects the UK economy to grow by 2.5% this year, down from the previous expectation of 2.9%. Next year, the Bank expects the economy to grow by 2.6%, up from 2.9% previously. The Bank still thinks that the economic outlook is solid despite the slowdown in Q1.”
“The BoE still expects wage growth to pick up due a combination of higher productivity growth and less slack in the labour market but stated that ‘the uncertainty around the path for wages is considerable’.”
“The Inflation Report was widely as expected and we still expect the Bank of England to increase Bank Rate in November. This is earlier than what is currently priced in the UK money market with the first full 25bp rate hike priced in April 2016.”
“Hence, the combination of additional EUR weakness caused by the ECB’s ‘hot potato effect’ coupled with re-pricing of the BoE should continue to keep EUR/GBP under pressure in the coming months and we still target EUR/GBP at 0.69 in 6M.”
“In the short term, however, further liquidation of short EUR/USD positions might counter some of the EUR/GBP downside potential.”
“On a six- to 12- month horizon, we expect EUR/GBP to stabilise and eventually move higher as the eurozone recovers and as eurozone inflation is set to pick up significantly. This should cause EUR downside to fade and we target the cross at 0.71 in 12 months.”
Key Quotes
“The BoE increased its inflation projection for 2015 slightly to 0.6% but lowered its projection for next year to 1.6%. The higher oil prices could lead to higher inflation in H2 15 than it previously anticipated while the stronger GBP continues to put downward pressure on inflation.”
“That said, the projection still indicates that inflation will rise above the 2% target in Q3 17. Hence the medium-term inflation outlook, in our view, still calls for a hike later this year.”
“Governor Mark Carney reiterated that the bank will look through one-off effects on inflation as the BoE recognises that monetary policy works with a lag.”
“The BoE also lowered its projected path for the unemployment rate and now expects unemployment to reach its estimated long-term equilibrium rate of 5.0% in Q1 17. Bank staff estimate that slack is broadly in the region of 0.5% of GDP, which is in line with the February report.”
“The Bank has also lowered its forecasts for GDP growth for the coming years. It now expects the UK economy to grow by 2.5% this year, down from the previous expectation of 2.9%. Next year, the Bank expects the economy to grow by 2.6%, up from 2.9% previously. The Bank still thinks that the economic outlook is solid despite the slowdown in Q1.”
“The BoE still expects wage growth to pick up due a combination of higher productivity growth and less slack in the labour market but stated that ‘the uncertainty around the path for wages is considerable’.”
“The Inflation Report was widely as expected and we still expect the Bank of England to increase Bank Rate in November. This is earlier than what is currently priced in the UK money market with the first full 25bp rate hike priced in April 2016.”
“Hence, the combination of additional EUR weakness caused by the ECB’s ‘hot potato effect’ coupled with re-pricing of the BoE should continue to keep EUR/GBP under pressure in the coming months and we still target EUR/GBP at 0.69 in 6M.”
“In the short term, however, further liquidation of short EUR/USD positions might counter some of the EUR/GBP downside potential.”
“On a six- to 12- month horizon, we expect EUR/GBP to stabilise and eventually move higher as the eurozone recovers and as eurozone inflation is set to pick up significantly. This should cause EUR downside to fade and we target the cross at 0.71 in 12 months.”