• International Financial Outlook Report – February 2018

    Summary of forecast changes

    • We maintain our central forecast for the BoE to raise interest rates by 25bps to 0.75% in August, but acknowledge that the risk of an earlier hike in May has risen. At the time of writing, financial markets attach about a 75% probability to a May rise and are fully pricing in an August rise. The main uncertainty in the near-term policy outlook is developments in Brexit negotiations, including an agreement on a transitional period after the UK leaves the EU in March 2019. Longer term, prospects for productivity and details of the final Brexit deal – including whether it is orderly or disorderly, and the degree of EU single market access – are the key unknowns.
    • We continue to expect the US Federal Reserve to raise interest rates three times this year to 2.25%, with the next hike likely on 21 March. New Fed Chair Jerome Powell will testify to Congress on 28 February. The tightness of the labour market and the fiscal boost to economic growth raise the risk of four rate increases this year. We expect the updated ‘dot plot’ in March to still show a median projection of three hikes, but there may be a shift in the views of some individual policymakers towards additional rate rises compared with December.
    • The ECB has maintained that interest rates will remain at present levels “well past” the end of bond buying, which is expected to continue at €30bn a month until at least the end of September. We expect the ECB to change its forward guidance gradually to enable it to wind down asset purchases by the end of the year, paving the way for interest rates to rise in mid-2019. It is likely to proceed cautiously with communication changes, however, given that inflation is still below target. Political risks centre on a ‘grand coalition’ in Germany, which has yet to be confirmed, and the possibility of a hung parliament in Italy following the general election on 4 March.
    • Our targets for 10-year gilt yields have been revised up to 1.8% for end-2018, but left unchanged at 2.0% for end-2019. We have revised up our forecasts for 10-year US Treasury yields to 2.9% and 3.1% over the same timeframe. German 10-year bund yield forecasts are projected to rise to 1.0% at end-2018 and 1.4% at end-2019.
    • Complex Brexit negotiations may yet weigh on sterling this year. Our targets for GBP/USD remain at 1.33 at end-2018 and 1.38 at end-2019, while GBP/EUR is forecast at 1.09 for both end-2018 and end-2019. We expect downward pressure on the US dollar to be contained and maintain our forecast for EUR/USD at 1.22 at end-2018 and 1.27 at end-2019.

    Read the full International Financial Outlook Report for February 2018.

    Read the previous International Financial Outlook Report for December 2017.

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