The UK has taken additional major steps towards reopening its economy. Supported by the success of the vaccination program, economists at ANZ Bank now expect GDP will grow by 6.2% this year and 5.3% next. They expect that the Bank of England will cut weekly quantitative easing (QE) purchases further in Q3. Regarding the pound, cable is forecast to rise gradually within the framework of DXY weakness.
BoE to reduce QE further, GBP outlook positive
“Following the release of Q1 GDP data (-1.5% QoQ), we have updated our UK recovery profile to better reflect the timing of the re-opening. In absolute terms, we make no material change to our end 2022 GDP estimate. However, the important nuance is that the UK can now close the output gap sooner. We now expect GDP will return to pre-pandemic levels by the middle of 2022 and forecast growth at 6.2% this year and 5.3% next.”
“If, as we expect, the economy continues to recover, we think the BoE will reduce QE further in Q3. However, it will be much more patient in raising interest rates, and we do not anticipate any adjustment to the bank rate over our forecast horizon to the end of 2022. The BoE will look through base effects, high commodity prices and bottlenecks on the CPI.”
“Within the framework of expected USD weakness, we anticipate further GBP appreciation and our 12-month forecast remains 1.50.”
“Some constitutional issues could unsettle sterling’s path. The new Scottish Parliament is pro-independence, and the SNP has pledged that it will hold another referendum within the first half of the new Parliament. Major issues with implementation of the Northern Ireland protocol are unresolved, while the effects of Brexit on financial services, FDI and labour force growth have yet to become clear.”
“Whilst we are constructive on the pound’s prospects, price action has the potential to be volatile in coming months.”