EUR/GBP: Uncertain outlook for BoE policy to weigh on the pound – Rabobank

The sharp move lower in EUR/GBP this morning demonstrates that the dust is still settling after last week’s Bank of England policy meeting. In the view of economists at Rabobank, the pound could continue to be buffeted by the debate about the possibility of 2022 rate hikes for some time.

Strong likelihood that the uncertainty will persist for some time

“For some forecasters, the takeaway from last week’s meeting is that the MPC could announce a small rate hike as soon as February. This view has clearly encouraged GBP bulls. Others, including ourselves, expect that the UK economy will be too fragile for the Bank to hike rates before 2023. This view suggests there could be plenty of headwinds in store for the pound in the coming months.”

“The initial assessment from Bank staff is that the recent fiscal announcements were likely to be broadly neutral for the growth outlook, as higher spending on health and social care would be funded by an increase in National Insurance Contributions and a rise in dividend tax rates. In our view, these fiscal changes could result in a drop in demand making a rate hike next year unnecessary or worse still a policy mistake. If rates are hiked too early, any initial gains made by the pound would almost certainly be temporary.”

“We have a long standing year end forecast of EUR/GBP 0.84. However, given the fiscal headwinds and our view that the BoE will not be able to hike rates until 2023, this could prove overly optimistic for GBP.”