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Goldman: Hiking Into The Abyss

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Goldman Sachs note that “the Bank of England delivered an unusual combination of a 50bp rate hike while also forecasting an imminent recession. The BoE’s baseline looks for weak or negative growth through mid-2024, with output falling about 2.2% peak-to-trough - roughly on par with the 1990/91 downturn. At the same time, the Bank projects inflation to fall below target by the end of the forecast horizon even without further rate increases. We have argued that the BoE’s emphasis on the growth outlook and more cautious approach to using policy to get inflation lower is a recipe for Sterling underperformance, and we see nothing in last week’s decision to change that view. The negative growth outlook, inflation forecast and diminished emphasis on the projections suggest that the BoE’s approach has not fundamentally changed, despite the 50bp hike. Overall, this is still a low relative real rate policy, which is negative for the currency.”

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Goldman Sachs note that “the Bank of England delivered an unusual combination of a 50bp rate hike while also forecasting an imminent recession. The BoE’s baseline looks for weak or negative growth through mid-2024, with output falling about 2.2% peak-to-trough - roughly on par with the 1990/91 downturn. At the same time, the Bank projects inflation to fall below target by the end of the forecast horizon even without further rate increases. We have argued that the BoE’s emphasis on the growth outlook and more cautious approach to using policy to get inflation lower is a recipe for Sterling underperformance, and we see nothing in last week’s decision to change that view. The negative growth outlook, inflation forecast and diminished emphasis on the projections suggest that the BoE’s approach has not fundamentally changed, despite the 50bp hike. Overall, this is still a low relative real rate policy, which is negative for the currency.”