| Economists agree: BoE April rate hike now almost fully priced in - bfinance FX and rates consensus |
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| 05/04/2004 | |
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The drumroll has been heard by all the economists. All the banks participating in the bfinance rate and exchange forecasts poll now believe that a 25bp repo rate hike by the Bank of England is inevitable. Recent developments are even leading them to believe that a tightening firmer than what was initially conjectured is now a strong possibility. The only exception to this general trend remains UBS Warburg, which continues to argue that the status quo will be the determining feature over the next six months. Laurent Fransolet, economist at JP Morgan, noted that " a rate hike on April 8 is now almost fully priced in. […]The typical pattern of the past six months might develop once again: a sell-off into the MPC meeting, followed by a rally afterwards." As a rule, economists from our pool bet on a rate increase in April, but a May move remains a possibility. "We judge that the chances of a rate hike in April have increased, although we are sticking with our original May call for the moment […] This reflects our view that domestic demand growth will weaken, driven by a slowdown in consumption", sums up a team of Lehman Brothers economists. Recent declarations by members of the Monetary Policy Committee (MPC) comforted the market's view about the likely scenario of a gradual rates tightening for the coming months, even though the overall feelings expressed by BoE officials were mixed. For instance, Andrew Large, deputy governor of the BoE expressed his concern at the build-up of the debt, indirectly reaffirming his support for a tightening of the monetary policy. On the other hand, Mervyn King, governor of the BoE, cast doubt on the need for further rate hikes due to the toll taken on the exporters by a strong pound. Malcom Barr, economist at JPMorgan noted that "BoE governor Mervyn King's reference to "acting clarity" in remarks to the treasury Select Committee this week appeared to signal his support for a rate hike in April." Overall, the economists we surveyed did not change their views and generally accredit the hypothesis that the BoE remains unlikely to stray off its current gradual tightening path. For the French bank Société Générale (SG), renewed strength of housing activity and higher house price inflation, even after the 50bp tightening in November 2003, act as a further incitation for the MPC to keep following its policy of raising rates. Even the appreciation in the value of the pound has so far failed to veer the MPC off from its stated policy. Brian Hilliard, economist at SG commented: « Even though inflation is running well below target, the Bank of England has embarked on a course to gradually tighten policy during most of 2004 and probably into early 2005 as well." As a consequence, repo rate should top at 4.50 in September 2004 and then keep going on the same upward course, reaching 5% by the first quarter of 2005 according to SG. On another note, economists surveyed by bfinance bank on a slight steepening of the long rate curve, with an average consensus at 4.95 over the full 2004 year. On March 16th, the ten-year rate was stable at 4.66%. Euroland In the Euroland, the overwhelming majority of the economists surveyed by bfinance still believe that the ECB will stick to its guns, leaving rates unchanged over the next six months. This was once again confirmed on April 1 when the ECB left its repo rate unchanged at 2%, where it has been standing since June 2003. However, the mood among some economists has evolved due to recent declaration by ECB officials. As such, signs of an emerging downward trend in some of their writings are now more persistent. "The ECB has changed its communication lately", writes Anne Beaudu, economist at the Crédit Agricole. "The probability of a rate decrease has gone up since the weakness of the economic recovery in the Eurozone is now obvious and ECB officials have become increasingly aware of the problem". The French banking institution is one of the few banks forecasting a lowering of the ECB rates, pitching a 25bp decrease over the next three months. This view was somewhat weakened last week by the ECB's President Jean-Claude Trichet, who reasserted that the ECB was still expecting a mild recovery, leading the eurozone bond market to dwindle. Meanwhile, SG, while sticking with its earlier call by staying put on its forecast over a six-month horizon, concedes that a decrease is now more likely than before. "The probability of rates peaking out, already taken into account by the market, is above 70%", commented Brian Hillard, economic research director at SG. The comment was formulated before Jean-Claude Trichet's declaration. Overall, the poll shows that the status quo in the near future is still the more likely scenario, with only three banks out of thirteen forecasting ECB rates will decrease over the next six months. Lehman, Dresdner and Crédit Agricole all prognosticated a 25bp decrease before September 2004. Only Lehman Brothers had done so the previous months. This could point towards an emerging trend that bears watching among the Eurozone market analysts. This e-mail address is being protected from spam bots, you need JavaScript enabled to view it |
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Articles of the same Serie : Consensus
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