• International Financial Outlook Report – December 2017

    Summary of forecast changes

    • We maintain our forecast for the BoE MPC to hike Bank rate by 25bps to 0.75% in Q3 2018, but political and economic uncertainties remain high. The likelihood of a disorderly Brexit has fallen, which may support business and consumer confidence, while supply-side constraints, partly driven by reduced availability of labour, may also contribute to inflation remaining above target for longer than policymakers are comfortable with.
    • In the US, there had been some speculation that additional fiscal stimulus may lead to a more hawkish signal for policy in 2018 and beyond. In the event, the Fed continued to signal three further rate increases next year, to 2.25% at the top end of its target band, which is also our central forecast. Jerome Powell is all but confirmed as the new head of the Federal Reserve from early February, while a number of other seats on the FOMC are either vacant or are set to open up in the near future, providing some additional uncertainty.
    • The ECB is likely to fulfil its announcement of a reduction to €30bn in monthly net bond purchases until the end of September 2018. We expect the ECB to wind down its QE programme thereafter, paving the way for the start of interest rate increases from Q2 2019. Critical to the policy outlook is the evolution of domestic inflation pressures which, so far, have remained subdued, despite robust economic growth. Political risks may come back to the fore in the early part of next year, as Italy holds a general election. Current polls point to a probable hung parliament.
    • Our targets for 10-year gilt yields have been nudged down to 1.5% from 1.7% for end-2018 and 2.0% from 2.1% for end-2019. We see 10-year US Treasury yields moving up to 2.7% and 3.0% over the same timeframe, which is unchanged from last month. German 10-year bund yield forecasts are also unchanged and are projected to rise to 0.8% at end-2018 and 1.3% at end-2019.
    • We have revised up our forecasts for GBP/USD to 1.33 from 1.31 at end-2018 and 1.38 from 1.37 at end-2019. Our targets for GBP/EUR have been revised up to 1.09 from 1.08 for end-2018 and left at 1.09 for end-2019. The forecast for EUR/USD is unchanged at 1.22 at end-2018 and revised up marginally to 1.27 from 1.26 at end-2019.

    Read the full International Financial Outlook Report for December 2017.

    Read the previous International Financial Outlook Report for November 2017.

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