8 December 2015 World Outlook 2016: Managing with less liquidity After remaining within a narrow band (0.Ipp) of zero for most of this year, inflation looks set to rise with base effects likely to add 0.6-0 7% by February. We expect CPI to average 1.1% in 2016 but it will probably still be shy of 1% at the time of the May inflation report. Evidence of rising inflation will be important to the BoE when it comes to deciding to tighten policy, as will improved prospects for wages and economic growth generally. Some on the Monetary Policy Committee would no doubt feel uncomfortable raising rates at the same time as having to explain the downside miss to its inflation target, but we do not expect this to stop the Bank from hiking. Should the Fed raise rates in December as we expect: then our call for the first BoE move in May looks reasonable based on past experience. The Bank is not governed by US policy — but there are numerous reasons we think the MPC will follow suit with a lag: i) globalisation has meant increased synchronisation, with both the BoE and Fed facing the same external conditions, ii) the UK is sandwiched between the tightening Fed and loosening ECB, iii) given the potential risks from a Fed move (particularly to EM), it seems reasonable for the BoE to wait given the UK's external sensitivity, and iv) in signaling the start of a hiking cycle a Fed tightening could push the dollar higher leaving the pound weaker (note our bearish sterling forecasts) — giving the BoE more room to cut. Figure 14: Macro-economic activity & inflation forecasts: UK Economic activity 2015 2016 2015E 201tif 20 ill. I% goy, scar) 01 02 al 04F 01F 02F ME (14F yov %New '!0., yoy GDP 1.6 2.6 1.9 2.6 2.6 2.6 2.6 2.6 2.4 2.6 2.3 Private consumption 3.1 3.7 3.0 2.4 2.4 2.4 2.4 2.4 3.0 2.6 2.4 Investment 6.3 4.2 6.4 4.1 4.9 6.7 6.7 6.7 3.9 6.1 6.0 Gov't consumption 4.4 1.6 6.3 0.0 0.0 0.0 0.0 0.0 2.4 0.8 0.0 Exports -4.7 7.8 3.6 2.4 2.4 2.0 2.0 2.0 3.6 2.7 1.8 Imports 2.6 -10.4 23.8 1.9 2.6 2.6 2.6 2.6 3.4 4.0 2.2 Domestic demand 4.1 -23 7.9 1.7 2.6 2.8 2.7 2.6 2.4 2.8 2.4 Contribution (pp): Stocks 0.1 -13 0.9 -0.1 0.1 0.1 0.0 0.0 -0.9 0.2 -0.2 Net trade -0.6 1.4 -1.6 0.0 0.0 -0.1 -0.1 -0.1 -0.1 -0.6 -0.2 Industrial production 1.6 2.4 0.8 0.8 0.8 0.8 0.8 0.8 1.2 0.9 0.8 Unemployment rate, % 6.6 6.6 6.3 6.3 6.2 6.1 6.1 6.0 6.4 6.1 4.9 Prices & wages I% yoy) CPI 0.1 0.0 0.0 0.1 0.7 1.0 1.1 1.6 0.0 1.1 1.9 Producer prices -1.8 -1.6 -1.8 -1.2 -0.1 0.1 1.0 1.6 -1.6 0.6 1.9 Compensation per empl. 2.3 2.6 3.0 1.9 2.4 2.3 2.6 3.0 2.4 2.6 3.4 Productivity 0.8 1.1 0.7 0.9 1.7 1.6 2.1 2.1 0.9 1.9 1.8 Sot.r. /6•00604•6600.3 00.001441043/0***re* The timing of UK rate rises could be impacted by the EU referendum. Currently the referendum bill is going through the upper house, where peers have amended the legislation which — if retained — would allow 16/17-year- olds to vote. This is contentious, as younger voters are seen as more supportive of EU membership. Whether or not this amendment is upheld, allovvreg 16/17-year-olds to vote could delay the previously expected timing of the •,,ote - either because of the time it takes to register the additional voters or because the bill goes back and forth before the elected Commons finally gets its way to drop the amendment. A pre-summer vote thus looks difficult (given the referendum cannot be held within four months of the bill being passed), with autumn more likely - if not into 2017. The Conservative Party's manifesto pledged a referendum before end 2017. A delay raises the risk that inward investment is not merely deferred but diverted to other countries. This could be particularly disruptive to growth given that the UK has the largest stock of inward investment globally outside Page 28 Figure 15: Other indicators & financial forecasts: UK ens 2014f 2.117$ M4givalh.16 1.1 04 26 30 RPM 00666406•006. FY 40 40 40 4.0 0044 Won 01P 60 4237 4260 4334 .1460 Toodelsobnc6.166/ OOP 43 41 es at Curnal 64044. 00 W 0.00•1 .020 414 me 420 moot% of COP 41 43 41 30 FitlIFICOOIJaKKOL t-ow (44:46 .r4014 C44:16 0ffici•I 0I) 00) 0A IS IN MO OW 00. GM 1.12 I004611 1.f0 1.46 2A0 2A0 um pe• OOP 1A2 19 Ii? 00/ 072 011 071 GT Soma' Meant Ala SUM Bent alonseol; ASO' DroorPor 07 Deutsche Dank AG/London CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL SDNY_GM_00265319 DB-SDNY-0119135 EFTA01458965