• International Financial Outlook Report – March 2017

    Summary of forecast changes

    • We have revised our central forecast for US monetary policy to a total of three hikes this year to 1.5%, up from 1.25% previously, and three hikes in 2018 to 2.25% compared with two hikes previously to 1.75%. We have nudged up our 10-year Treasury yield forecasts by 10bps to 2.8% at end-2017 and 3.1% at end-2018.
    • Potential uncertainties surrounding ‘Brexit’ and a willingness to ‘look through’ what is anticipated to be a temporary spike in inflation mean that we continue to expect the Bank of England to remain on hold for now. There are risks in both directions but our central forecast remains that Bank Rate will stay at 0.25% until the UK’s departure from the EU. Nevertheless, global factors are likely to pull term rates higher and we expect 10-year gilt yields to reach 1.6% by end-2017 and 2.2% by end-2018.
    • We expect no change in the ECB’s main refi rate over the two-year forecast horizon, but its forward guidance may be tweaked in the coming months to reflect diminishing deflation risks. Nevertheless, asset purchases are set to continue until at least the end of this year and, we believe, it will be extended well into next year, albeit with further reductions in the monthly pace.
    • The key change to our FX forecasts is the uplift for the euro, resulting from a slightly more hawkish tilt in the ECB’s policy communication and indications that it is debating whether the deposit rate should be raised before the end of QE. We have revised up our EUR/USD target to 1.10 for end-2017 and 1.13 for end-2018. Our GBP/EUR forecast has been reduced to 1.18 and 1.20, respectively, for the same periods.
    • We maintain our relatively positive view for sterling, with GBP/USD targets at 1.30 for end-2017 and 1.35 for end-2018. There are significant uncertainties surrounding these forecasts, but the working assumption is that an orderly UK-EU deal will be negotiated.
    • Our USD/JPY and AUD/USD projections have been left unchanged from last month. We see USD/JPY at 108 at end-2017 and 105 at end-2018, while AUD/USD is forecast to be at 0.81 and 0.83, respectively, for the equivalent periods.

    Read the full International Financial Outlook Report for March 2017.

    Read the previous International Financial Outlook Report for February 2017.