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.

Read More: Sterling hits new 8-month low in GDP downgrade

Britain, EU contemplate rate cuts

Britain recently became the latest European nation to entertain the possibility of interest rate cuts.  In its last meeting, held earlier this month, two of the Bank of England’s nine governors voted to cut the federal interest rate by 25 basis points to 4.25%.  There were other members who felt the interest rate cuts made economic sense, but should not be carried out because they would not be widely expected.  Additionally, the minutes from the most recent ECB meeting reveals it, too, is giving serious consideration to rate cuts.  Investors and traders, alike feel rate cuts by both central banks are becoming increasingly likely, reflected in changing bond prices.  The Financial Times reports:

On Wednesday the December Euribor future hit a record high, with the market pricing in about a 40 per cent chance of a cut in eurozone interest rates by the year’s end.  The euro has fallen 5 per cent on a trade-weighted basis since the start of the year, a sign of poor economic prospects, leading to market expectations of rate cuts.

Read More: Central banks flag rate cuts