The Bank of England (BoE) looks poised to join the early rate tighteners soon. That said, current market pricing for policy rates by end-2022 looks too aggressive (bank rate 1.25%). Economists at ANZ Bank think there are solid macroeconomic justifications for GBP appreciation to do some of the heavy lifting.
“We had previously expected the BoE to raise interest rates by 15bps to 25bps around the middle of next year, but we have now brought that expectation forward to this quarter as an early, modest tightening by the BoE seems appropriate. The signal it would send from an inflation expectations perspective is important.”
“However, market pricing that three-month money will rise to 1.25% by the end of next year looks stretched. Such a sharp rise in the bank rate could have serious implications for financing conditions for both corporates and households and could risk an abrupt end to the expansion. We are therefore not convinced that the current degree of tightening priced into markets is warranted.”
“We continue to forecast GBP appreciation versus USD. We project a move back into the 1.40s vs USD in coming months, with progress towards 1.50 throughout much of 2022.”
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