International Financial Outlook Report – December 2018
Summary of key forecasts
- Our central view remains that it is more likely than not that the UK leaves the EU with a withdrawal agreement and a transitional period. The risks surrounding this modal view have increased, given the prevailing political and economic uncertainties. For now, we have left unchanged our central forecast for UK Bank rate to rise to 1.00% in Q3 2019. Financial markets have pushed out the next rate rise to late 2020.
- The US Federal Reserve is on course to raise rates in December to 2.5%. We continue to see two further increases next year to 3%.
- In the euro area, with confirmation that the ECB’s net asset purchases will come to a close this year. We have pushed out our central view for the first rate rise by a quarter to Q4 2019. Financial market expectations for the first 10bps rise have been deferred to early 2020.
- We have revised down our UK and German 10-year gilt yield targets for end-2019 to 1.6% from 1.9% and 0.7% from 0.9%, respectively. US 10 year Treasury yield forecasts have been lowered to 3.2% from 3.3% for end-2019.
- We see GBP/USD and GBP/EUR at 1.33 and 1.08 by end-2019, implying a rise in EUR/USD to 1.23. However, there is a risk of higher volatility as we approach the March 2019 deadline for Brexit.