More NewsRBS Forecast Predicts ECB Rate Cut in June

RBS Forecast Predicts ECB Rate Cut in June

In its latest Interest and Exchange Rate Forecast, RBS has stated that it expects the European Central Bank (ECB) to cut interest rates in June 2014. The report reflects on comments from ECB President Mario Draghi this month in which he noted that the Governing Council was dissatisfied with the projected path of inflation, and that the ECB comfortable with acting in June – with the caveat that this would be based on seeing a new set of ECB forecasts. Based on this, the RBS report states it expects the ECB to cut interest rates in June by 15bps, to 0.1%. The report also predicts that the interest rate banks receive on their deposits at the ECB (currently zero), will be cut. This would mean that banks would be charged a fee to deposit funds at the ECB.

The RBS Forecast also includes an amended forecast for rates in the UK. Whereas an increase in rates in the UK had been predicted for Q1 2016, the new expectation from RBS is for this to be brought forward to Q3 2015. One reason for this change comes from the May Minutes of the Bank of England’s (BoE’s) Monetary Policy Committee, which noted that “it could be argued that the more gradual the intended rise in Bank Rate, the earlier it might be necessary to start tightening policy.” The RBS report states it would not be surprised to see one or two MPC members voting to raise rates towards the end of this year. In addition, the report notes that there is more momentum in the UK economy than it had expected. For example, retail sales were up 6.9% over the year to April 2014, the fastest for almost a decade. “At that sort of pace, the economy will reach ‘escape velocity’ sooner than we had anticipated,” says the report. “It may already be there.” Finally, the report also noted that market forward rates put the chance of a rise by the middle of 2015 at around 75%.

Despite the Bank reiterating that interest rates would only be used to cool the housing market as a last resort, with macroprudential policy the BoE’s tool of choice, we now think Q3 2015 is more likely than Q1 2016. Bringing the first rate hike forward by six months would not represent a significant shift for borrowers or savers, but does imply a slightly stronger profile for sterling-dollar than we had previously.

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