UK: BoE to hike rates in May, inflation should slowly recede - Wells Fargo

According to analysts from Wells Fargo,  see the Pound strengthening against the Dollar, yet weakening modestly versus the Euro.

Key Quotes: 

“Uncertainties surrounding Brexit negotiations continue to weigh on U.K. economic growth, with real GDP rising only 1.4 percent in Q4 year over year. Despite the overall slower pace of growth, demand-side data depict a more positive outlook, as consumer spending and business fixed investment picked up in Q4.”

“In the wake of Brexit in 2016, the sharp depreciation of the pound caused inflation to shoot higher. Inflation still remains elevated, up 3.0 percent year over year in January, which subsequently restrained consumer spending and real income growth in 2017. However, inflation should slowly recede in the coming months, likely leading consumers to see some pick up in real income growth as a result.”

“Although the Bank of England (BoE) left rates unchanged at its most recent meeting, the Monetary Policy Committee (MPC) sees only a “limited degree of slack” in the economy. The MPC also noted that “domestic inflationary pressures are expected to rise,” with the committee now looking to tighten policy more quickly than previously thought. We now look for the BoE to hike rates at the May 10 policy meeting in light of higher inflation and its more hawkish policy stance.”

“Future monetary policy tightening and general greenback weakness lead our currency strategy team to see the pound strengthening against the dollar, yet weakening modestly against the euro. We look for real GDP to grow 1.6 percent this year and 1.8 percent in 2019.”