British pound exchange rates (GBP): Standard Chartered warn of 3 consecutive quarters of UK GDP decline

Last Updated on Thursday, 26 January 2012 11:04 Written by Will Peters Thursday, 26 January 2012 10:58

Analysts at Standard Chartered are notably more downbeat than those at the Bank of England and say significantly more quantitative easing will be needed.

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Pound exchange rates are already reflecting a new bout of quantitative easing to be announced in February / March. Hence, latest inflation data and yesterday's poor GDP figures were unable to shift pound exchange rates.

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br />Should the outlook for the UK economy deteriorate further than expected, however, then more money will need to be pumped into the UK economy via quantitative easing.

And this will pressure pound exchange rates lower.

Standard Chartered stand out amongst their peers with a new note to clients warning that "UK GDP likely to see three consecutive negative quarters."

This is a significant assessment as they believe such declines in GDP will warrant the Bank of England to raise its  quantitative easing target to GBP 350bn in February and GBP 400bn in May.

This is more than market consensus, and should these predictions be met then markets are likely to react by selling the British Pound.

The note from Standard Chartered says:

"We remain downbeat on the outlook, and expect a further contraction in Q1-2012 (as opposed to the Bank of England, which expects broadly flat output in Q1).

"The UK economy continues to suffer from a fiscal and credit squeeze, ongoing contraction in household real incomes, deleveraging and the impact (on trade and confidence) of the euro-area crisis – which we expect will stay in the headlines in the coming months.

"The weak economic environment and the phasing-out of temporary factors supporting inflation should allow CPI inflation to fall sharply in January and then decline steadily to below the 2% target by Q4-2012. Falling inflation, contracting credit and weak activity make a strong case for expanding the QE programme.

"We expect the asset purchase target to be raised by GBP 75bn in February, with more to come mid-year if our 2012 growth forecast (down 1.3% y/y) is correct."