The recent strong EUR / GBP move down shows that dust is still settling after last week’s Bank of England (BoE) policy meeting, Rabobank economists say. They see that the pound could be hit by the debate over the possibility of rate hikes by 2022 for some time.
“For some forecasters, the bottom line from last week’s meeting is that the MPC could announce a small rate hike as early as February. This view has clearly encouraged GBP bulls. Others, including ourselves, we hope that the UK economy is too fragile for the bank to raise rates before 2023. This view suggests that there could be a lot of headwinds for the pound in the coming months. “
“The initial assessment from bank officials is that the recent fiscal announcements are likely to be broadly neutral to growth prospects, as higher spending on health and social care would be financed by an increase in National Insurance contributions and a increase in tax rates on dividends. In our opinion, these tax changes could result in a drop in demand making a rate hike unnecessary, or worse, a mistake, next year. If rates rise too soon, any gains initial earned per pound would almost certainly be temporary. “
“We have a year-end forecast of 0.84 for the EUR / GBP. However, given the headwinds of fiscal policy and our view that the BoE will not be able to raise rates until 2023, this could be too bullish for the GBP“.