Outlook for 2011: how the interest rates could change in the coming months, a report prepared by Barclays.

1. Interest & Exchange Rate Outlook
January 2011
Welcome to our latest bulletin, which provides information revised downwards (by 0.1 percentage points) in
only commentary on the issues affecting interest and December, at 1.1% and 0.7% respectively, quarterly
exchange rates. growth in the second and third quarters of 2010 was still
above the long term average (around 0.6%).
Economic Background
This has raised concern amongst some in the MPC that
The Monetary Policy Committee (MPC) left Bank Rate persistently high inflation could lead to a self-fulfilling rise
unchanged at its historic low of 0.5% following its January in inflation expectations, and that higher-than-expected
meeting. The Bank’s £200 billion quantitative easing (QE) growth in 2010 may indicate that the UK’s output gap is
programme was also left on hold. Both decisions were smaller than appreciated, and therefore will have less of a
widely expected. However, the minutes of the meeting are dampening effect on medium-term inflation than the
likely to reveal a further three-way voting split on the MPC. Bank’s current forecasts suggest. As a result, one member
of the MPC has voted in favour of raising Bank Rate at
The divergence of views underlines the scale of the recent meetings.
dilemma that the MPC faces. Consumer price inflation has
remained at least one percentage point above the Bank’s However, another MPC member has advocated expanding
2% target rate since January 2010 and accelerated once QE, arguing that above-target inflation has been heavily
more (to 3.3%) in November. According to the minutes of influenced by temporary factors (sterling weakness, higher
its December meeting, the MPC concluded that this VAT and commodity prices) and that underlying inflation
month’s rise in VAT, recent signs of a rise in global price is relatively weak and likely to remain so, especially as the
pressures (particularly in commodity markets) and an recovery appears to be losing momentum. In December,
increase in some utility prices “could well [see inflation] the MPC noted that “business surveys had indicated, on
reach 4% by the spring, somewhat higher than the balance, that activity growth might slow a little in Q4 and
November Inflation Report central projection”. Q1 to slightly below its historic average rate” with further
solid growth in manufacturing offset by slower service
UK economic growth has also surprised on the upside sector growth. The unemployment rate has also picked up
during 2010. Although official quarterly GDP growth again (to 7.9%), which is likely to maintain downward
estimates for each of the first three quarters of 2010 were pressure on wage growth. At the same time, the housing
Period Averages Base Rates 12-Month 3-Year 5-Year Euro/£ Dollar/£
Interbank Swap Swap
2007 5.51 6.0 5.8 5.7 1.46 2.00
2008 4.68 5.6 5.0 5.0 1.26 1.85
2009 0.64 1.7 2.6 3.3 1.12 1.57
2010 0.50 1.4 1.9 2.6 1.17 1.55
Q1 2010 0.50 1.3 2.3 3.1 1.13 1.56
Q2 2010 0.50 1.4 2.0 2.7 1.17 1.49
Q3 2010 0.50 1.5 1.7 2.3 1.20 1.55
Q4 2010 0.50 1.5 1.7 2.3 1.16 1.58
October 2010 0.50 1.5 1.5 2.1 1.14 1.59
November 2010 0.50 1.5 1.7 2.3 1.17 1.60
December 2010 0.50 1.5 2.0 2.7 1.18 1.56
Forecasts*:
April 2011 0.5 1.5 2.4 3.1 1.20 1.59
July 2011 0.75 1.7 2.6 3.4 1.20 1.58
January 2012 1.00 2.2 3.0 3.7 1.20 1.58
Page 1 of 2

2. market continues to soften, with consumer confidence continued sovereign debt concerns and fears over the
also fragile. health of the eurozone financial system. It is therefore,
expected to leave interest rates unchanged throughout
Looking ahead, the UK economy faces significant 2011. However, eurozone inflation has risen to an above-
uncertainties. With households still heavily indebted and target rate of 2.2%, and the ECB President’s warning that
the fiscal tightening beginning to bite, growth in the the bank is prepared to act if rising price pressures become
economy is likely to be heavily dependent upon business entrenched has seen market expectations of an ECB rate
investment and exports. However, the latter faces the risk rise brought forward to the early months of 2012.
from the fiscal tightening in the Eurozone and the potential
effects of an escalation of the sovereign debt crisis in Exchange Rates
peripheral Eurozone countries.
Renewed eurozone sovereign risk tensions weighed
Interest Rates heavily on the euro during December and briefly pushed
the single currency back below US$1.30 at the beginning
Consequently, whilst acknowledging the divergent risks to of January. However, it has subsequently rallied following a
inflation, the uncertain outlook suggests that the majority series of relatively successful peripheral eurozone
on the MPC will vote to leave monetary policy unchanged sovereign debt auctions, reports that Germany may be
in the coming months as they wait and see how events willing to back an expansion of the €440 billion European
unfold. However, with concerns over a possible ‘double- Financial Stability Facility and signs that eurozone leaders
dip’ recession having receded and a further pick up in may be willing to countenance greater economic policy
inflation likely, the market view is that rate tightening will co-ordination. The ECB President’s hawkish comments on
begin earlier than expected a month ago, with a rise in inflation have also bolstered support for the euro.
Bank Rate as early as August now considered a distinct
possibility. Sterling exchange rates
Monthly averages*
UK interest rates 2.25
Base rates, per cent Market implied*
2.00
7.0
6.0 1.75
5.0
1.50
4.0
1.25
3.0
2.0 1.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
1.0 Euro/Sterling (LHS) Dollar/Sterling (LHS)
*Latest observation December 2010 Source: Bank of England
0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
*Market expectations 10 January 2011 Source: Bank of England & Barclays Bank Against this backdrop, sterling appreciated against the
euro, but fell back against the dollar during December.
Although generally positive in tone, the Federal Reserve’s Expectations of an earlier rise in Bank Rate than previously
latest Beige Book concluded that US “economic activity anticipated have seen sterling pick up against the dollar
continued to expand moderately”. The US central bank once more, but have not been sufficient to offset the
remains concerned that the current pace of growth is recent improvement in euro sentiment, which has seen the
insufficient to reduce high unemployment and with the pound ease back once more against the single currency.
property market also still weak and inflation low, it is
currently expected to complete the planned US$600 billion
expansion its QE programme as scheduled by the end of Prepared: 18th January 2011
June and to maintain the federal funds target rate at 0%-
0.25% for an “extended period.” Please note: This bulletin, and the commentary within it, is provided by
Barclays Bank PLC and is intended to be used as information only. Whilst
Barclays and its employees take every care to ensure that the content is
The European Central Bank (ECB) kept its policy rate on
accurate, Barclays will accept no responsibility or liability in respect of any
hold again at 1% this month. The ECB continues to errors, inaccuracies and losses which may arise from its use.
purchase ‘peripheral’ eurozone government bonds and to
provide emergency liquidity to the region’s banks, amid
Source of ONS data: National Statistics website: www.statistics.gov.uk
Crown copyright material is reproduced with the permission of the Controller of HMSO
Barclays Corporate is a trading name of Barclays Bank PLC and its subsidiaries.
Barclays Bank PLC is registered in England and authorised and regulated by the Financial Services Authority.
Registered number is 1026167 and its registered office is 1 Churchill Place, London E14 5HP.
Page 2 of 2