Nick Cawley Blog | GBP Forecast Q2 2022: The Bank Of England's Inflation And Growth Puzzle - Monday, April 11 | Talkmarkets
Currency Analyst
Contributor's Links: DailyFX

Nicholas Cawley is an Analyst at DailyFX, where he contributes leading news and analysis in forex and other assets.

With almost two decades of experience trading and broking a variety of fixed income products, Nick turned to reporting, using his market expertise to cover a wide range ... more

GBP Forecast Q2 2022: The Bank Of England's Inflation And Growth Puzzle - Monday, April 11

Date: Monday, April 11, 2022 8:48 AM EDT

The Bank of England (BoE) is expected to raise UK interest rates further in the second quarter of 2022 as the UK central bank tries to stem soaring prices pressures. The BoE has already lifted the Bank Rate to 0.75% from 0.1% in late 2021 and money markets are currently pricing in 125 basis points of additional rate hikes this year. The latest Office for National Statistics (ONS) inflation release showed headline inflation hitting 6.2% in February, a fresh 30-year high, while core inflation rose to 5.2% from 4.4% in January. And even higher levels of inflation are expected in Q2 this year. The latest BoE monetary policy release shows that the UK central bank expects headline inflation to top 8% in the coming months, citing sky-high energy and food prices as the main drivers of the move.

Please add a description for the image.

Source: TradingEconomic.com

The UK central bank recently pushed back against these market expectations, fearing that a series of hikes may stall growth in the months ahead. UK growth is now back above pre-covid levels and looks robust, despite fears that the Ukraine crisis, and Russian sanctions, will cause further supply chain disruptions. The latest BoE monetary policy report noted that while business confidence and labor market activity have remained robust, ‘consumer confidence has, however, fallen in response to the squeeze on real household disposable incomes’. It is this worry that a downturn in consumer spending will slow economic activity in the months ahead, especially with inflation expected to hit, and stay at, multi-decade highs. According to the BoE, UK GDP is now expected to be flat for Q1, compared to 1.1% in Q4 2021. The chart below shows that the central bank’s inflation expectations from the February MPC meeting are already on the low side.

Please add a description for the image.

Source: ONS and Bank Calculations

It is this inflation vs. growth conundrum that will cause Governor Bailey and the members of the Monetary Policy Committee to be flexible and yet still resolute in trying to quell inflation. If the central bank moves too hard, too quickly, and causes growth to falter then fears of stagflation will hit the UK markets and Sterling. On the other hand, if the BoE reacts slowly and multi-decade high inflation becomes entrenched, then they will have to act even more aggressively to get a grip on UK price pressures. The Bank of England will need to be balanced, sure-footed, and clear with its communications over the next few months if they are to succeed.

The British Pound In The Months Ahead

Sterling has had a mixed Q1 and the outlook for the second quarter of the year is expected to continue these trends. GBP/USD slipped lower during the first three months of the year as the US dollar priced in a series of interest rate hikes during 2022 and into the next year, widening the rate differential between the two currencies. Sterling rallied against the Japanese Yen, primarily due to JPY weakness, while EUR/GBP traded sideways with a slight negative bias. The British Pound also fell against the Australian dollar, as the commodity-rich country benefitted from sharply higher metal and mineral prices. These overall trends are likely to continue unless there is a major shift in the macro outlook, namely the ongoing crisis in Ukraine.

Paginate |
Disclaimer: This and other personal blog posts are not reviewed, monitored or endorsed by TalkMarkets. The content is solely the view of the author and TalkMarkets is not responsible for the content of this post in any way. Our curated content which is handpicked by our editorial team may be viewed here.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.