We have made minor adjustments to our longer-term financial forecasts for the UK. Below we summarise our scenario and the key reasoning behind the numbers.
We expect a gradual recovery
The UK is likely to recover faster than the Euro area because of the more aggressive BoE, the weaker GBP and the still not too bad development on the labour market, but slower than the US because half of UK exports are to the EU.
We believe recent key figure improvements have further to run near term, but depend crucially on the Euro area stirring clear of new adverse events and on the Fed tapering at a pace that the economy and the markets can cope with.
Currently, key figure improvements seem fairly broad based.
Nothing more from the Bank of England
Mr Carney will take over from Sir King as governor of the Bank of England 1 July. Carney has talked forward guidance with individual MPC members already, but more dovish Fed-style forward guidance will be difficult when inflation is already high and unemployment is low.
More BoE easing is possible – not to be ruled out – but not our baseline. Forward guidance will be difficult and more QE too seems unlikely as only 3 members including King has voted for this option in recent MPC meetings and key figures are improving.
Minor changes to financial forecasts
We expect the BoE to keep rates unchanged throughout our forecast horizon. This is unchanged.
We expect lower market rates in the near term followed by a rather gradual increase in rates during next year. See more in The bulls strike back. We see 10Y swap rates at 2.65% at end-13 and 3.10% at end-14. We expect curve steepening this year out followed by curve flattening next year.
Our main scenario is a broad-based USD strengthening in the longer end of our forecast horixon due to Fed tapering and relatively stronger US growth. The USD strengthening is also expected against the GBP. However, we still expect the GBP to outperform the EUR because of stronger growth and higher rates.
All in all, that leaves us with end-13 forecasts of 0.82 for EUR/GBP and 1.52 for GBP/USD.
Nordea