Bank of England chief says United Kingdom to underperform until mid

Andrew Cummings
September 19, 2017

The Bank of England's monetary policy committee is expected to vote for a 0.25 percentage point rise at its November meeting, and again in May 2018, HSBC's United Kingdom economist Liz Martins said in a research note.

But he added that he expects these inflationary pressures will persist as the United Kingdom pivots its economy away from the European Union and toward other markets farther afield, a process that he said could take years.

HSBC said that they expect rates to be raised by 25 points, possibly starting from November this year, going up to 0.75 per cent. It would be the first hike in United Kingdom rates in a decade.

The Bank of England is likely to raise interest rates in the "coming months" to dampen down inflation, Bank of England Governor Mark Carney has signalled. "But HSBC warned the move could be 'premature", forcing the Bank to cut rates once again.

As a result of its new BoE forecasts as well as other "cyclical forces", HSBC said it was revising its year-end sterling forecast by a full 15 cents to $1.35 GBP=D3. The sterling has also attained an over 1.1% against the euro to reach a €1.137 on Friday night.

"The de-integration effects of Brexit can be expected to steepen the Phillips Curve and to be inflationary", said Carney in the 2017 Michel Camdessus Central Banking Lecture held by the International Monetary Fund (IMF) on Monday.

Explaining their change of view on Friday, Barclays' economic research team said in a note that it did not reflect a more optimistic view of Britain's economic outlook. Economists increasingly expect the central bank to nudge up borrowing costs in November.

On the other hand, if Carney fails to talk up the chances of the BoE raising interest rates before the end of the year this could leave the GBP USD exchange rate vulnerable to further downside pressure.

Sterling recorded its strongest week in more than eight years last week, with an nearly 3 percent climb against the dollar to above $1.36, after the BoE said rates were likely to rise in the "coming months".

"Is Carney already beginning the great rate expectations row back?" said Jeremy Stretch, head of Group-of-10 currency strategy at Canadian Imperial Bank of Commerce in London.

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