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IPFS News Link • Central Banks/Banking

Done With Orban

•, by Maartje Wijffelaars

The main difference was, however, that in the UK the votes were not unanimous: two members voted in favour of a hike, one for a cut, and six to keep the rate unchanged. The MPC reiterated that it remains prepared to adjust monetary policy as warranted by economic data to return inflation to the 2% target sustainably, but dropped the warning that more hikes may be needed to get there. So despite the votes in favour of a hike, the BoE adopted a more dovish tone.

Looking ahead, our UK strategist Stefan Koopman expects the BoE to keep its policy rate on hold until September, after which it will start a gradual cutting cycle. This is later than the market is pricing for. It also means we expect the BoE to start cutting in the same month as the ECB (September), yet later than the Fed (June). Together with current market pricing and the UK economy performing better recently than the Eurozone, this informs our view that there is scope for EUR/GBP to edge lower to the 0.84 level on a 6-month view.

Indeed, January's PMI surveys suggest that activity in the Eurozone contracted at the start of the year (composite PMI at 47.9), while the UK economy started on a relatively good footing (PMI composite at 52.5). So while we still foresee significant structural economic weakness for the UK, in the short term it could well outperform the currency block. This is largely due to weakness in Germany (composite PMI at 47.1), while French surveys (composite PMI at 44.2) also paint a gloomy picture. Germany was also the weakest performer among large member states last year, with its economy falling 0.3% q/q in 23Q4.

For the Eurozone overall, 2023's ending was like a party without cake. It managed to avert a forecasted contraction, and hence a recession, yet stagnation is as good as it got, against the backdrop of a significant increase in interest rates since mid-2022.

Going forward, recent survey data suggests that the downturn is bottoming out, but weakness certainly persists. Although we believe that consumer spending growth should start to recover over the course of 2024, there is more uncertainty when it comes to investment activity. In a publication published earlier this week we zoom in on investments, looking at recent developments and the outlook. In short, we expect investment growth to recover moderately over the coming quarters, even though past rate hikes are still working their way through the economy and self-financing capacity of firms has reduced. Drivers are a significant drop in capital market rates over the past months, untapped potential in the Recovery and Resilience Facility, and last but certainly not least, strategic motivations.

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