Lloyds Bank See Softer Pound and Bank of England Interest Rate Rise in February
Last Updated: 14 August
The Bank of England will raise interest rates in February say Lloyds Bank who had previously factored in a November rise.
The prospect of higher interest rates at the Bank of England are seen as the guiding force of the stronger British pound which has risen 6.6% since the start of 2015.
The GBP rally picked up momentum over the mid-year period as strong data saw markets bring forward their forecasts for the first interest rate rise with many starting to price in a November hike.
The November hike gained popularity on the back of expectations of a September rate rise at the US Federal Reserve as it is historically proven the Bank of England only moves after the US Fed.
In August it appears momentum may be swinging back to the 2016 camp on observations that both banks may now hold fire in the wake of recent Yuan devaluations by the People’s Bank of China.
The devaluations have introduced added risk to global markets while flagging underlying softness in the global economy.
Lloyds Bank have thus informed clients that they have turned more sanguine on rate rises:
“We have shifted our call for the start of UK policy tightening from November to February next year. The risks around this are asymmetric: the first move could come later if the global outlook continues to deteriorate and near term inflation pressures continue to fade.”
The UK Bank rate is now expected to end 2016 at 1% rather than 1.25%.
Lloyds have also pared their end-year forecast for UK 10-yr bond yields to 2.2% from 2.5%.
Sterling Momentum to Wane
This inevitably will have a knock-on effect on the British pound exchange rate.
“We see less upside sterling momentum against the euro in the near term and maintain our expectation of downside risks against both the euro and the US dollar in the medium term.”
The Lloyds GBP/USD forecast has been lowered to 1.54 from 1.56 for end-2015 and to 1.45 from 1.47 for end-2016.
“Similarly, our GBP/EUR target for end-2015 has been brought down to 1.44 from 1.46, and the end-2016 forecast lowered to 1.24,” say Lloyds.
