BoE: Watching, waiting - Rabobank

Research Team at Rabobank explains that the Office of Budgetary Responsibility has joined the Bank of England in making a sizeable increase in its growth forecasts for this year and both now expect the UK economy to expand by a healthy 2% this year. 

Key Quotes

“The pace of growth in future years, however, appears less rosy.  Not long after the Bank revised up its growth forecast last month, the Q4 GDP report brought some worrying news on investment.  Consumer surveys are also indicating a nasty souring of sentiment, most likely on the back of rising prices. The Bank has warned that there is only so much inflation that it will look through and has indicated that monetary policy can respond in either direction to changes to the economic outlook.  However, with inflation threatening to progressively erode real incomes and pressure demand, we see little risk of the BoE hiking rates.  We expect steady policy well into next year and potentially through into 2019.”

“Sterling Outlook: The longer the uncertainty over the form of UK’s future relationship with the EU lasts, the longer the potential downside pressure on investment spending, employment growth and demand.  We see scope for GBP to be pressured lower vs. the EUR in the coming months.  On the back of recent better economic data from the Eurozone, a less dovish ECB and the assumption that Le Pen will not win the French Presidency, we expect EUR/GBP to trade towards 0.89 by year end and 0.90 on a 12 mth view.”