British Pound and Bank of England Outlook: Analyst and Economist Views

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The Pound was languishing at the bottom of the major currency barrel ahead of the weekend after the Bank of England (BoE) suggested markets were mistaken to expect Bank Rate to rise much from November's newly-increased level.

Sterling rose against a falling Dollar on Friday but fell against many other currencies and remained comfortably the worst performer within the G20 basket for the week due to losses sustained in the wake of Thursday's BoE decision.

Thursday's declines had stretched to almost two percent in some Sterling pairs and despite the BoE raising Bank Rate by three quarters of a percentage point to a total of 3% in what was its largest increase for more than three decades.

Above: Pound Sterling performance against G10 counterparts on Friday and for the week overall. 

Sterling was swamped in losses after the BoE downgraded already bleak forecasts for the economy and said Bank Rate is unlikely to rise to the levels anticipated by many economists and financial markets.

New forecasts illustrated how an earlier anticipated recession is now expected to last for a full two years rather than the originally envisaged five quarter period while warning that a crumbling economy and falling inflation could leave the BoE short of its two percent target by the end of 2025.

All of this came as a disappointment for the interest rate derivative markets and any forecasters who'd previously looked for Bank Rate to rise above five percent during the opening half of next year though it had little impact on the expectations implied by prices or rates in the interest rate derivative market. 

Source: Market implied expectations for BoE Bank Rate. Source: ANZ Research. 

Prices in the interest rate derivative market had implied ahead of the decision that there was an expectation for Bank Rate to rise to 4.7% by June next year while that number had merely edged lower to around 4.67% by Friday.

This leaves markets still looking for significant further increases in interest rates with implications for the Pound and UK economy in the months ahead.

Below analysts and economists outline what these might be.  

Francesco Pesole, FX strategist, ING

"The bottom line is that the BoE is essentially shutting the door to another 75bp, and we expect a 50bp hike in December."

"The negative reaction in the pound was – in our view – not just due to the dovish repricing in rate expectations, but also a re-connection of FX dynamics with the rather concerning domestic economic outlook, which was flagged quite clearly by the BoE."

"Indeed, the downside risks are still quite significant, and next week's GDP numbers will surely be watched quite closely: consensus is currently around a 0.4% quarter-on-quarter contraction."

"Risks are skewed towards a re-test of 1.1000 in cable [GBP/USD] over the next few days, with today's US payrolls possibly adding pressure on the pair."

Stefan Koopman, senior macro strategist, Rabobank 

"The economic forecasts imply the UK is already in recession, and that GDP will fall for eight straight quarters until mid-2024." 

"The forecasts should be taken with a grain of salt. Chancellor Hunt’s £50 billion tax and spending plan is not fully incorporated and the plugged in forward curve is outdated."

"These [tax increases] could be worth £50 billion, or 2% of GDP, but will be detailed on Nov. 17." 

"We expect a 50 bps rise in December and a 4.75% terminal rate. That amplifies the recession."

Derek Halpenny, head of research, MUFG 

"We cannot think of a time when a major central bank has expressed such pessimism and forecast such dire economic conditions ahead. Our brief summary is that we believe the key takeaway from the announcements yesterday is that we might not reach our forecasted terminal rate of 4.00% we have pencilled for Q1 2023."

"The BoE has been wrong on inflation and the markets more accurate but that does not mean the BoE will be wrong this time and while the GDP projections (8 consecutive quarters of contraction) may prove too pessimistic we concur with the basic message – the implied terminal rate is too high."

"The pound remains very vulnerable to the downside for now. The US and even the euro-zone look set to perform better than the UK and that economic underperformance relative to the most of the rest of the G10 will likely be reflected most easily through GBP depreciation."

"The grim GDP forecasts from the BoE don’t even incorporate the coming fiscal consolidation to be announced on 17th November. GBP/USD will be back below 1.1000 soon enough."

Andrew Goodwin, chief UK economist, Oxford Economics

"Strikingly, the BoE's forecast based on rates remaining at 3% over the forecast horizon also showed inflation falling well below the 2% target. Moreover, the language of November's policy statement was unusually explicit in signalling investors have got it wrong."

"The latest economic data offered little counter to the MPC's downbeat prognosis. October's PMIs were mostly in contractionary territory. And a large rise in household saving and weaker demand for credit in October dampened hopes that dissaving will offset cost of living pressures." 

"We think that GDP will struggle to do more than stagnate in Q4, even factoring in the support that will come from Q4 having a full quota of working days, after both Q2 and Q3 had one extra bank holiday." 

"Policy is far from being set solely based on the outputs of the BoE's forecasting model. Nonetheless, the language used in the minutes and by BoE governor Andrew Bailey in his press conference suggests that November's 75bps hike is unlikely to be repeated."

Fabrice Montagne and Abbas Khan, economists, Barclays 

"We believe the pushback was predominantly designed to tame expectation of excessive tightening, rather than squash expectations of hiking."

"There remain considerable policy risks in the MPC's forecasts. On one side, risk around the Autumn Statement are on the downside, in our view, as we expect the government to announce consolidation measures currently not taken into account by the Bank."

"On the other side, the "modelling" choice of an extended Energy Price Guarantee (EPG), halfway between the current EPG and the Ofgem formula, is meaningful, as it lowers headline inflation forecasts because it is assumed to be universal, despite the stated government policy of extending the support through targetted measures."

"The Bank may find itself in a position to revise its 2023 inflation forecasts higher and consider addressing related second-round effects and risks around inflation expectations."

Dean Turner, economist and strategist, UBS Global Wealth Management

"The Bank’s revised outlook did factor in an early end to the Energy Price Guarantee."

"If the support package is less generous, the hit to the economy is likely to be materially larger. However, this is a doubleedged sword, as inflation would also be higher."

"The Bank’s response to this cannot be known for sure, but we think it would err on the side of caution, as the economy will likely already be in recession by then."

"We look for the Bank of England to hike when it next meets in December, and expect further increases in the first quarter of next year. As mentioned above, the risks are to the downside for the peak in the bank rate."

"We held firm in our view that the risks to GBPUSD are to the downside. Following Thursday’s Bank of England meeting and Wednesday’s Federal Reserve meeting, which was altogether a much more hawkish affair, we see little reason to change our views for now."