Staff Reporter
Morgan Stanley has revised its economic outlook for the UK, projecting a decline in growth for 2025. The financial institution anticipates that the Bank of England will implement five interest rate cuts during this period.
In a note released on January 27, analysts at Morgan Stanley (NYSE:MS) adjusted their UK GDP growth forecast from 1.4% to 0.9%, which is also below the consensus estimate of 1.3%. This downgrade takes into account a stagnant fourth quarter of 2024 and a reduction in growth expectations for the first half of 2025, influenced by recent survey data.
The bank has lowered its projections for private consumption and business investment in early 2025, citing evidence of reduced non-essential spending by businesses and signs of weakness in the labor market. Furthermore, there is increasing confidence in a significant slowdown in real disposable income growth this year.
“Risks are heavily weighted to the downside,” Morgan Stanley noted, indicating a cautious outlook for the UK economy in the near future.
Predictions indicate that the Bank of England will lower interest rates in February, with the Bank Rate anticipated to drop to 3.5% by the end of the year, down from the current 4.75%.
Morgan Stanley analysts stated, “However, we believe that the balance of risks concerning growth and inflation isn’t quite tilted enough for the Monetary Policy Committee (MPC) to indicate a willingness for immediate insurance cuts. Therefore, we are shifting our long-standing expectation for a March cut to June.” They added that, based on their assessment of growth and inflation risks, the possibility of action in March remains higher than what the market currently reflects.
The bank now forecasts interest rate cuts in February, May, June, August, and November.
Despite these anticipated rate reductions by the Bank of England, Morgan Stanley maintains that its bearish outlook on the USD, alongside extremely short positioning on the GBP, could lead to a short-term recovery in GBP/USD from its current low levels.
“We believe the recent correlation between yield differentials and GBP/USD will likely continue in the short term, with lower gilt yields compared to US Treasuries coinciding with a recovery in GBP/USD,” the analysts noted. They recommend taking long positions in GBP/USD, targeting a rise to 1.27.
