| BoE expected to keep its repo rate unchanged for months to come – April bfinance rates and FX consensus |
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| 03/04/2005 | |
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In the short term, most economists surveyed by bfinance expect the UK repo rate to stay put. This is well summarised by BNP Paribas' Raymond Van der Putten: "Keeping in mind that the prospects in the services sector are deteriorating and that the housing market continues to cool down, today's CIPS survey provides further evidence that growth has fallen below trend. Hence, the Bank of England's Monetary Policy Committee is likely to keep its repo rate unchanged at next week's meeting." At a three-month horizon, three banks forecast a quarter point hike, and one a quarter-point cut. At six months, the banks don't budge and are still split equally. One has to look further to see the next rate move still in formation. And according to Lehman Brothers' team of economists, it is likely to be a cut rather than a hike,. "All in all, our below-consensus, below-Bank of England growth forecast has led us to pencil a series of rate cuts into our forecast. Indeed, our new model forecast envisages the repo rate returning to its mid-2003 through by end-2006", they write. No need to worry about inflation under those terms. "A weaker outlook for consumer spending has made us more comfortable with the view that interest rates are very near to a peak and, crucially, that the repo rate will start to fall before the end of 2005. Our view that the MPC may sanction 125bp of rate cuts over the next two years leaves us well below market and consensus expectations", they add. Nevertheless, JPMorgan's economists also point to the widening dispersion of MPC opinion in March, which still leaves scraps of upside risks. "Sir Andrew large joined Paul Tucker in the vote for higher rates in March. The remaining seven members of the MPC appear to be dividing into two groups, based on their attitudes towards the spending data and the inflation forecast", they say. European confusion In the Eurozone, the consensus of our pool of economists is trailing behind the market. While the market has already priced in a quarter-point hike, most economists surveyed by bfinance expect the next move to take place in only six months time, which would leave the ECB repo rate at 2.25% at the end of September. But this is no a clear-cut consensus, with Merrill Lynch putting it at 2.50% in September and IXIS CIB expecting a quarter-point cut at 1.75%. "The market feeling could be wrong. It is not sure at all that there will be a recovery in the Eurozone by the beginning of 2006, and there are reasons to be worried about the risk of a continuation of a sluggish growth", analyses Patrick Artus, who heads the research department of IXIS CIB. For HSBC CCF, "in spite of the status quo and thanks to the disinflation, the regularisation of the ECB rate is partially realised." This leads them to believe that the ECB will leave its rates untouched. Finally, a median consensus on 10-y European rates is established at 3,90 % in six months time. Fed funds clarity The Federal Reserve has made economists' calls easier in the United States. Everyone in our pool has heard the FOMC message delivered in March: the median forecast at six months was inched up by 50 bp. According to Merrill Lynch, the Fed even seems to wish that the market price in the likelihood of a half-point increase of the Fed funds in the next months. All in all, our economists say, the hikes should top at 3.75 by the end of year. Regarding the rate of 10-year treasury notes, a consensus is established at 4.80% at the end of September. However, Dresdner, which expects only one last quarter-point hike of the fed funds and which bases its forecast on a gloomy scenario, sees this rate at 4.30%. Far from JP Morgan's call, which forecasts fed funds at 4.50% at 10-y treasury notes at 5.25% in September. FX The euro, currently at 1.30, is expected to remain strong against the dollar. Sticking to the twin deficits and equilibrium parity arguments, our analysts bank on a euro at 1.35 in six months. But some questions are now being raised: "does the US current deficit really affect the dollar", ask HVB's economists in their last research note. J.L. |
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