Investing.com - Morgan Stanley has downgraded its view of UK economic growth in 2025, expecting the Bank of England to cut interest rates five times during the period.
“We revise down our UK GDP growth projection for 2025 from 1.4%Y to 0.9%Y (vs. 1.3%Y consensus), taking on board our tracking of a flat 4Q24, and downgrading 1H25 growth, given recent survey evidence,” analysts at Morgan Stanley (NYSE: MS ) said, in a note dated Jan. 27.
The US bank cuts its view of 1H25 private consumption and business investment growth, given evidence of cuts to non-essential business spend, and given emerging labor market weakness, and its growing confidence in a fairly sharp slowdown in real disposable income growth this year.
“We see risks as tilted heavily to the downside,” Morgan Stanley said.
This is expected to result in the Bank of England cutting interest rates in February, with the Bank Rate falling to 3.5% by year-end, from the current 4.75%.
“However, we suspect the balance of risks around growth and inflation is not quite yet tilted enough for the MPC to signal willingness for sequential near-term insurance cuts. Hence, we move our long-standing March cut call into June,” the US bank said. “To us, largely on how we see the balance of risks around growth and inflation, this is a close call, and we do still see the chance of action in March as higher than the market prices.”
On balance, the bank now expects cuts in February, May, June, August and November.
Yet, despite these expected rate cuts by the Bank of England, Morgan Stanley thinks the combination of its USD-bearish view as US rates fall, and extremely short GBP positioning, will likely drive a short-term recovery in GBP/USD from depressed levels.
“We think that the recent correlation between yield differentials and cable can persist in the short term, with lower gilt yields (relative to US Treasuries) coinciding with a recovery in GBP/USD,” Morgan Stanley added. “We recommend long GBP/USD positions, targeting 1.27.”
At 05:50 ET (10:50 GMT), GBP/USD traded 0.2% higher at $1.2500.