UBS Analysts Predict Similar Monetary Policy Stances for ECB and BoE, Euro-to-Pound Pair to Trade Slightly Weaker
In a recent note to clients, analysts at UBS suggest that the European Central Bank (ECB) and Bank of England (BoE) are likely to adopt similar monetary policy stances in the near future. However, the BoE is expected to take a slightly more hawkish approach compared to the ECB.
The economic situation in both regions is deemed to be fairly similar, with a slight tilt toward strength in the UK and weakness in the Eurozone. As a result, the analysts estimate that the euro-to-British pound currency pair will trade slightly weaker but remain steady within the range of £0.83 to £0.85. They also anticipate that volatility in the currency pair will remain suppressed.
The recent decision by the Bank of England to keep its benchmark interest rate unchanged at 5.0% reflects a desire to take a gradual approach to future policy easing following a rate cut in August. Economists had expected this decision, especially after UK consumer price growth came in close to the bank’s target, with services inflation running hot at 5.6%.
The prospect of sticky services inflation in the UK has led many forecasters to believe that the BoE will move slower than other central banks to implement rate reductions. Other indicators, such as wage growth and overall economic stagnation in July, also play a role in shaping the BoE's policy decisions.
On the other hand, the European Central Bank recently reduced borrowing costs for the second time in three months, lowering its deposit facility rate by 25 basis points to 3.5%. Despite headline inflation in the eurozone slowing to a two-year low of 2.2%, ECB President Christine Lagarde emphasized that future policy moves will be data-dependent.
In summary, investors can expect a slightly weaker euro-to-pound exchange rate in the near term, with both central banks taking cautious approaches to monetary policy. The differing economic conditions in the UK and Eurozone will likely shape the trajectory of interest rates and currency valuations in the coming months.