Pound Exchange Rates: Bank of America forecast Bank of England interest rate hike… in 2013

Last Updated on Friday, 17 February 2012 13:57 Written by Sam Coventry Friday, 17 February 2012 13:54

See today's latest spot pound exchange rates here.

The British pound has lost significant ground since the Bank of England cut interest rates to a record 0.5pct and many with an eye on the foreign exchange rate space will be looking for the first signs of interest rate tightening to herald an appreciation in the pound.

It is a strengthening UK economy, one year out from now, is likely to push the hand of the Bank of England to raise interest rates.

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Bank of America Merrill Lynch say that it is plausible for the Bank to raise interest rates more aggressively than the market is currently expecting.

BofA say:

"Rolling the BoE’s forecasts forward a year from now, if GDP growth were already at 2% yoy and expected to pick up to 3% thereafter (Chart 17), and if CPI inflation were only slightly below target (≈1.7%) and expected to edge up thereafter, it seems plausible that BoE could be tightening interest rates more swiftly than the 50bp through 2013H2 and 2014 currently priced into markets."

Thus, while such forecasts are far in the future and the much more prominent debate remains whether the BoE might expand QE further in the months ahead, BofA Merrill Lynch retain forecasts of two 25bp rate increases in the second half of 2013. 

Looking at the latest action from the FX space we see the pound euro exchange rate has fallen significantly in recent hours, the GBP/EUR could now challenge a break below 1.2.

The declines comes as investors go into the weekend in a relatively positive mode.

"Hopes that a deal for Greece is getting closer sparked huge short covering among FX majors, once again to the detriment of the US dollar. Due also to a light data calendar for today, position paring ahead of the weekend should continue, keeping trading quite nervous and volatile," says an FX note from UniCredit.