Synopsis:
Nomura has updated its forecast for the Bank of England’s (BoE) monetary policy following recent UK economic data that showed unexpectedly high services inflation and wage growth. While still predicting a rate cut in August, the pace of subsequent cuts is expected to slow, reflecting persistent inflationary pressures. This revised outlook indicates a greater policy divergence between the BoE and the European Central Bank (ECB), potentially influencing EUR/GBP exchange rates.
Key Points:
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Unexpected Inflation and Wage Data: UK services inflation reached 6% in March, surpassing expectations set by Nomura, the BoE, and consensus forecasts. This development, combined with recent data showing accelerated wage growth, underscores persistent inflationary pressures within the UK economy.
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Revised BoE Rate Cut Forecast: Nomura maintains its prediction of a 25 basis point rate cut by the BoE in August but has adjusted its longer-term forecast. The firm now anticipates that the BoE will implement rate cuts every other meeting, aiming for a Bank Rate of 3.75% by the end of 2025, indicating a slower pace of monetary easing than previously anticipated.
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Comparison with ECB Policy: The revised forecast highlights a clearer divergence in monetary policy between the BoE and the ECB, especially in contrast to the Federal Reserve’s policies. This divergence could potentially exert more downward pressure on the EUR/GBP pair.
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Potential Impact on EUR/GBP: Nomura suggests that the distinct paths of monetary policy adjustment between the BoE and the ECB might lead to increased downward pressure on the EUR/GBP exchange rate, as the markets adjust to these expectations.
Conclusion:
Nomura’s adjustment of its BoE rate cut forecast reflects a cautious approach to monetary easing amid persistent inflation and wage growth in the UK. The expected policy divergence with the ECB could influence the EUR/GBP exchange rate, potentially favoring the pound in the medium term.