Exchange & Interest Rate Forecasts

Signs of economic slowdown have led central banks across the globe to cut official interest rates, including developed economies such as the US, UK, Japan and eurozone, and major developing economies like India and China.

Signs of economic slowdown have led central banks across the globe to cut official interest rates, including developed economies such as the US, UK, Japan and eurozone, and major developing economies like India and China. We expect further global monetary easing in the coming year, together with significant fiscal support measures (China just announced a $586bn package), as growth slows and inflationary fears recede. The use of public funds and coordinated action to restore health to financial sectors will also continue.

 

Accordingly, our latest forecasts show a significantly different profile for interest rates and exchange rates compared to those of only a few months ago. In the UK, the surprisingly large 1.5% cut in Bank rate earlier this month has raised the possibility of further cuts in the months ahead should economic conditions remain weak. The ECB has moved less aggressively but signalled the possibility of further cuts at its latest meeting. In contrast, the BoJ may be reluctant to cut again. In the US, the Fed is likely to cut interest rates to 0.5% in December as the economic downturn worsens. But looking further out into the future, our forecast shows the US will be the first major economy to raise interest rates in 2009 as economic recovery emerges in H2.

 

Accurately predicting currencies at this time of increased uncertainty and volatility is extremely difficult and point estimate forecasts therefore come with a health warning, however, some recent market shifts have confirmed several of our long-standing views. We predict further appreciation of the US$ in the coming 18 months against most of its trading counterparts. Our latest forecasts show £/$ at 1.46 at end Q1 2009 and €/$ is predicted at 1.20. In contrast, sterling is forecast to continue to weaken on a trade-weighted basis, reflecting the UK’s large structural external and fiscal deficits.
 

Full report