• International Financial Outlook Report – February 2017

    Summary of forecast changes

    • Current forecasts are made amid significant political uncertainties – including how ‘Brexit’ negotiations play out, Donald Trump’s policies and European elections. Our working assumption is for an orderly UK-EU deal, but other scenarios range from the UK staying in the EU to the UK leaving the EU with no deal. These alternate scenarios would have sharply different implications for forecasts.
    • We have left unchanged our forecasts for key central banks this year. We expect the Bank of England to ‘look through’ the spike in consumer price inflation this year and maintain the policy rate at 0.25%, although the upside risks have risen.
    • The March meeting for the US Federal Reserve is ‘live’, but we believe officials will defer the next policy hike until June. The gradual build-up in domestic inflationary pressures and uncertainties about the Trump administration’s polices provide policymakers the leeway to wait.
    • The ECB, meanwhile, appears to be on a pre-set course of asset purchases this year, but policymakers will be watching inflation and political risks closely. While deflation fears have subsided, leading to talk of ‘tapering’, President Draghi reiterated that asset purchases could be ramped up if necessary.
    • Our long-term fixed interest rate forecasts are broadly unchanged. We look for UK 10yr gilt yields to rise to 1.5% this year, with similar increases in US 10yr Treasury and German 10yr bund yields, to 2.7% and 0.5%, respectively. Euro area bond spreads could remain elevated, given prospects of political fragmentation in upcoming elections.
    • In our central view, we look for sterling to appreciate against the US dollar and the euro this year to 1.30 and 1.21, respectively. Significant political events, including the evolution of the ‘Brexit’ negotiations, mean that an understanding of the risks to the forecasts is extremely important.

    Read the full International Financial Outlook Report for February 2017.

    Read the previous International Financial Outlook Report for January 2017.