FXStreet (Delhi) – Research Team at HSBC, suggests that despite a softer global backdrop, they forecast 2.4% growth in UK GDP in 2016 and further expects a 25bp rate rise in May, slightly later than their own previous call but still earlier than implied by the market. Key Quotes “If the world economy became more uncertain in 2015, no-one told the UK. Although overall GDP growth slowed in 2015, real consumption by households, firms and even government accelerated. We think final domestic demand grew at its fastest annual pace since 2003. While this pace of growth may moderate, a tightening labour market and rising productivity growth should mean real incomes continue to grow. This should support spending meaning the UK can still grow at 2.4% in 2016 and post the fastest growth in the G7 for the third consecutive year. Interest rates to rise in May 2016: The recent oil price falls and lagged impact of higher sterling mean we expect CPI inflation to remain below 1% until Q3 2016. But with unemployment very close to its ‘natural’ rate and wage growth likely to rise, we think there is a strong case for the MPC to tighten monetary policy. That said, further commodity price falls and some recent dovish BoE communications mean we now expect the first 25bp rate rise in May 2016. This is three months later than our previous call but still considerably earlier than market expectations. We forecast just one further 25bp rate rise in 2016. EU referendum uncertainty: The prospect of a referendum on EU membership could cast a long shadow of uncertainty over the UK outlook. This is likely to weigh on investment spending. But it could also affect the monetary policy cycle. Our working assumption is a referendum in the early autumn. This would allow the MPC to make one move before the vote and one after. Macroprudential action: 2016 should also see more macroprudential policy from the BoE. We expect it to raise the countercyclical capital buffer on banks’ UK exposures from zero to 0.5% in March. While some of this will simply be relabelling existing capital requirements, the first ever move in this key macroprudential tool will be a significant moment. The first interest rate rise for more than nine years, combined with a macroprudential signal that the credit cycle is moving into a new phase, mean 2016 could be a big step towards the ‘normalisation’ of the UK economy.” For more information, read our latest forex news.