UK Interest Rate Expectations Drive Pound Sterling (GBP) Forecast

May 20, 2016 - Written by John Cameron

STORY LINK UK Interest Rate Expectations Drive Pound Sterling (GBP) Forecast

Bank of England Rate Hike Uncertainty Causing Marked GBP Price Swings

Institutional investors place great store on interest rate expectations and the effect which they have on currencies. The Pound Sterling (currency : GBP) has endured significant price action during recent months thanks to the wild swings in the anticipated timing of the first Bank of England (BoE) interest rate hike in a fresh policy tightening cycle.

Sterling-watchers were expecting Base Rate to be heading higher last Christmas following BoE Governor Mark Carney’s prediction last Summer that UK interest rates would be heading Northwards ‘around the turn of the year’. However, the intervening period has seen the British economy slip into deflation and the Old Lady of Threadneedle Street change its tune to such an extent that recent commentary has hinted that an interest rate cut might now be on the cards.

Scott Bowman of Capital Economics explained earlier this week that,

‘Despite market pricing suggesting there is a 30% chance that rates will fall this year, a cut does not appear to be on the cards. The minutes did not mention the possibility of rate cuts and the MPC says 'it is more likely than not that Bank Rate will need to increase over the forecast period'.

‘While we think rising inflation will require a hike in interest rates late this year, the path back to target should be a relatively slow one, meaning interest rates can increase only gradually. Indeed, the committee said that rates should pick up at a rate that will be slower than past tightening cycles. We think there is still plenty of spare capacity in the economy, allowing for a pick-up in growth without stoking significant inflationary pressures. Following the first rise in November this year, we expect just two hikes next year, leaving Bank Rate at 1.25pc by the end of 2017.’

UK Interest Rates may not Rise until December 2019

Meanwhile, the money markets paint a drastically different picture. Until last month’s Bank of England monetary policy committee meeting, these futures markets were implying that the date of the next UK interest rate hike would be June 2020.

The mildly hawkish tone of the April MPC minutes caused the money markets to alter the implied date to December 2019.

Either way, if they are correct, then the Pound is forecast to have a torrid four years ahead.

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TAGS: Pound Sterling Forecasts