Britain stands apart — the way they like it. For better or worse, Britain is an island, and its entrance into the EMU is not even a distant speck on the horizon. Analysts point to an overall solid domestic picture, a hawkish central bank and foreign reserve diversification into the pound as underlying supportive factors for the currency over the near and intermediate term.
In early November, the Bank of England (BOE) raised rates 25 basis points, pushing the base rate to 5 percent for the first time in five years. With the next meeting fast approaching on Dec. 7, market watchers expect the BOE to stand pat for now. The next meeting is scheduled for Jan. 11.
Guest forecasts a slowdown in Britain’s real GDP growth in 2007 to 2.0 percent, down from 2.4 percent in 2006.
However, Guest actually sees potential for stronger-than expected performance in some aspects of the UK economy.
“Income growth is the main uncertainty,” he says. “Our forecast is conservative and events in the housing market could lead to more rapid household income growth that we currently foresee.”
Overall, Guest believes the UK’s medium-term prospects are sound. “The recovery is a question of pace, not direction, although we do believe the speed of growth will flatten next year as private consumption growth remains slow,” he adds. “If an unexpected downturn occurs, the central bank has some room to lower interest rates in order to boost domestic growth.”
Regarding both the Eurozone and Britain, David Solin, partner at Foreign Exchange Analytics notes, “You go through these periods where all the economies line up. The economies in Britain and the Eurozone have picked up and they are both in tightening modes. That puts the currencies on a seemingly similar glide path.
“Through year-end, you should still see the same type of movement [for the euro and the pound swinging back and forth within the ranges,” he adds.
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