June 30th 2005
British GDP forecasts signal rate cuts
According to fresh economic data, growth is slowing in Britain. Real GDP growth of 2.1% is now projected, compared to earlier forecasts in the 2.7% range. Declining real GDP forecasts accompanied the release of trade data and housing statistics, which also seemed to signal economic slowdown. The situation is not as dire as the data would suggest, as much of the forecasted decline can be attributed to higher-than-expected inflation. Nonetheless, a rate cut at the next Central Bank meeting looks acutely possible. In recent meetings, a minority of central bank governors have proposed rate cuts, which were ultimately vetoed. While the GDP data would seem to necessitate a cut at the next meeting, nothing can be assumed. For instance, traders have currently priced in a mere .03% cut (which is impossible) into the price of British interest rate futures. The Financial Times reports:
"The market can slam a currency quickly if it believes that a fundamental shift in interest rate psychology could be afoot," said senior currency trader. Said another trader, "The sterling looked “overvalued” against the main European crosses." [He] advised his clients to build a long euro/sterling position.