The economy picks up and sterling is likely to strengthenThe Bank of England will hold a decision on interest rates on Thursday. The Dutch central bank said that the Bank of England will not cut interest rates as quickly as the market expects because of the steady recovery of the British economy.
Knut A. Magnussen, A senior economist at the Dutch central bank, said the British economy "seems to be on a steady upswing." We see little pressure on the Bank of England to cut interest rates."
He said the Bank would cut rates again in November and at "every other" meeting, meaning it would take a slow approach.
Goldman Sachs economists also issued a view that the Bank of England will soon open the floodgates and will introduce a series of interest rate cuts in November.
Goldman Sachs believes the market is underestimating the magnitude of the upcoming rate cut, which would mean lower lending rates in the UK and could weigh on the pound and mortgage rates.
The divergence of views between the Dutch central bank and Goldman lies in different expectations for service sector inflation and wages, two variables closely watched by the Bank of England. Goldman Sachs thinks they will cool quickly, while the Dutch central bank thinks not.
The Dutch central bank believes that wage and service inflation in the UK will continue to fall, but the decline will be slow and keep the Bank of England on its guard.
Money market pricing suggests investors want bank rates to fall "all the way" to about 3.25 per cent. That is 75 basis points lower than the Dutch central bank's expected terminal rate.
Magnussen said: "We believe that the strengthening Labour market and increased economic activity will limit the extent of rate cuts. It seems plausible that lower inflation and wage growth will provide scope for rate cuts, but as long as the UK economy avoids recession, we believe rates will only fall to around 4%."
If the Dutch central bank is right, sterling and mortgage rates could be supported by UK interest rate differentials for longer.
Indeed, the Dutch central bank is not alone in offering their own views on the boe's decision and the outlook for sterling.
With the Bank of England unlikely to cut interest rates this week, the pound is likely to strengthen.