Market expects UK rates to fall to 1.5% further weakening the currency
“It seems longer but it is only a few months ago since central banks were concerned about inflation – indeed, the ECB responded by raising rates in July. The world has turned since then, and monetary policy is being loosened at a rapid clip. Central bank rhetoric has inevitably changed everywhere but the most striking reversal of tone and content has come from the Bank of England”, according to Bank of Ireland’s November Bulletin which was published today, Friday 28 November 2008.
Author of the Bulletin, Dr. Dan McLaughlin, Group Chief Economist, Bank of Ireland said: “The MPC shocked the markets by cutting rates by 1.5% in early November, taking the Bank rate to a 55-year low of 3% and the Quarterly Inflation Report then projected a much bleaker economic outlook than envisaged by most commentators. The Bank expects the UK economy to contract for four more quarters, having first recorded negative growth in Quarter 3 this year, resulting in an annual GDP decline of 1.9% by the second quarter of 2009, and an average fall in GDP of 1.3% next year. The latter compares with a consensus view of -0.9%, leaving the Bank at the more pessimistic end of the forecast spectrum.
“The Bank of England projection is predicated on an unchanged Bank rate of 3%, it has to be said, and rates are now likely to be much lower, given that the Bank expects inflation to average only 1% in 2010, a full percentage point below the target. This implies that interest rates need to fall further, and substantially so, and as a result the market is now pricing in at least another 1.5% reduction, taking rates to levels never seen before in the UK.
“This expectation, and a rapid deterioration in the Government’s fiscal outlook, helped propel sterling lower against the major currencies over the past month, pushing it out of its broad 77 – 82 pence range against the euro in the process. The single currency market may now establish a new 80 – 86 pence range, which is higher than we envisaged and as a result we are changing our sterling forecast to reflect this change in market sentiment towards the UK currency”, concluded Dr. Dan McLaughlin.
28 November 2008
Dr. Dan McLaughlin
Group Chief Economist
Bank of Ireland Global Markets
Tel: 01 609 3221
Media Relations Manager
Group Corporate Communications
Bank of Ireland