Doha: The Great British Pound (GBP) plummeted during the COVID-19 pandemic, temporarily below the levels seen after the 2016 Brexit referendum. Since then, GBP has recovered to a peak of 1.4 per US $. In early 2021, but recently, we experienced another sharp decline. The main reason for depreciation is the difference in communication and approach between the Bank of England (BoE) and other major central banks such as the Federal Reserve System (FRB). In essence, the BoE is becoming more easing by raising interest rates more aggressively than the Fed. This will put investors moving assets from the UK to the US, seeking higher risk-adjusted returns and putting downward pressure on GBP.
Many central banks, including the Fed and BoE, are in a difficult position as they face stagnation shocks that increase inflation and weaken economic growth. This means that raising interest rates needed to curb inflation risks putting the economy into recession.
This week, QNB will first compare inflation in the United States and the United Kingdom, and then delve into the outlook for GDP growth in both countries.
The disruption of energy supply due to the war in Ukraine is the main difference between the United States and the United Kingdom. For example, gas prices in Europe are much higher than gas prices in the United States. As a result, UK headline inflation is expected to peak at around 10% in the fourth quarter, significantly higher and behind the US.
Second, wage growth has risen to about 5% in both the UK and the US, but the UK’s departure from the EU has curbed the return of skilled workers from the European Union (EU) to the European Union (EU). As a result, the UK labor market remains even tighter than the US. British labor market.
Last but not least, the fall in GBP is putting upward pressure on the prices of UK imports and services. This is because the UK usually buys imports from the larger markets of the US, EU, and Asia. These markets are often priced in US dollars or euros. Inflation will be under further pressure as imports and services become more expensive in GBP.
In summary, the UK’s inflation outlook is worse than the US, which means the BoE is under pressure to curb inflation more than the Fed.
At the same time, the UK’s GDP growth outlook is much weaker than the US. The IMF expects growth in the United States to slow from 3.7% in 2022 to 2.3% in 2023, while growth in the United Kingdom will slow from 3.7% in 2022 to 1.2% in 2023. I am. This exposes the BoE to more severe backward headwinds than the United States. In fact, the BoE recently released its own forecast. This was even more bearish, with GDP in 2023 shrinking by 0.25%.
In summary, the BoE is currently facing an even more difficult situation than the Fed. On the other hand, inflation expectations, wages, energy and import prices are higher in the UK than in the US, further exacerbating inflationary pressures. This suggests that the BoE needs to be more hawkish than the Fed to curb inflation. But on the other hand, the UK’s lower growth outlook than the US suggests that the BoE needs to be more accommodative than the Fed to support economic activity and growth.
Therefore, QNB does not expect the BoE to raise rates by 50 basis points (bp) to the Fed at the next two meetings in June and August. Rather, QNB expects the BoE to stick to a steady pace of 25bp rise at each policy meeting to avoid a sharp slowdown that could turn into a recession later this year.