GBP to suffer in the first quarter as Europe is better placed to deal with COVID-19 than the UK – MUFG

For the UK, extremely high infections mean hospital capacity is diminishing fast although vaccination roll-outs are faster. The hit to economic growth is likely to be most severe in the UK and economists at MUFG Bank now expect the Bank of England (BoE) to cut rates into negative territory at its next meeting on February 4. GBP will therefore under-perform this year.

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Key quotes

“The national lockdown announced on January 4 will ensure a double-dip recession. MUFG forecasts -3.8% GDP in Q4 and -2.7% in Q1 2021. Assuming the current lockdown serves to alleviate capacity pressures on hospitals and vaccination roll-outs accelerate sharply, the hit to the economy in Q4 and Q1 can reverse quickly. The 2 million per week government target for vaccinations will be tough to achieve and we can only expect a gradual reversal from full lockdown from March onwards.”

“The additional hit to GDP from this latest more infectious COVID-19 wave will we believe result in a rate cut from the BoE in February. We now expect the BoE to lower the key policy rate into negative territory in February based on the increased severity of covid. The trade deal with the EU will not be enough to offset BoE concerns.”

“GBP underperformed in 2020 and we expect that to continue in the first quarter as the BoE cuts rates and the UK economy suffers more than elsewhere. Assuming successful roll-outs of vaccines, GBP can then recover from Q2 onwards.”