Mitsubishi UFG Notes Market Implications From Bank of England's Policy Decision

10:27 AM EDT, 06/19/2025 (MT Newswires) -- The Bank of England left rates unchanged on Thursday, as expected, sai MUFG.

The six-to-three vote split was in line with the bank's expectations but more dovish than the consensus. The key guidance was left unchanged, but the BoE acknowledged softer domestic data but also flagged possible risks from higher energy prices.

Before the BoE announcement on Thursday, sterling (GBP) had been underperforming -- on a month-to-date basis, sterling is the third worst-performing G10 currency with only the low-yielding Swiss franc (CHF) and Japanese yen (JPY) performing worse.

The Middle East uncertainties and the risk of increased financial market volatility were likely factors that saw sterling underperform, given bouts of financial market volatility tend to coincide with sterling underperformance, given the United Kingdom's current account deficit.

The flow of economic data, while not compellingly bad, may have weighed on sterling performance as well, given that the key labor market data was weaker than expected, wrote the bank in a note to clients.

MUFG view Thursday's meeting as consistent with the underperformance continuing, as there is nothing from the BoE to suggest higher rates and sterling strength. The 6-3 vote and the general tone of the statement and minutes look to the bank consistent with a 25bps cut at the August meeting.

Before the announcement, which wasn't fully priced and so front-end yields have scope to drift lower as market participants increase positioning for an August cut. The statement makes reference to the fact that the labor market has "continued to loosen," which has added to a wider "margin of slack."

This is the clearest signal of where the homegrown risks now lie in relation to MPC policy rate expectations going forward, stated the bank.

That said, there is very little in Thursday's communication to suggest a chance of a pick-up in the pace of easing, despite the 6-3 vote. The counter to that more dovish vote and the acknowledgement of the opening of more slack due to labor market weakness, the BoE maintained the view of there being "two-sided" inflation risks, in part due to the external uncertainties -- the Middle East and trade tariffs.

That will contain the financial market reaction as it is consistent with the "gradual and careful" approach to monetary easing. As such, no suggestion here of an increased pace of easing, which would have prompted bigger foreign exchange and rates moves.

MUFG concluded from a market direction perspective, the BoE communication on Thursday is broadly neutral with a slight dovish tilt. What Thursday could mean going forward is that if investors get further labor market weakening confirmed in the data, market participants will be a little quicker to price in the prospect of back-to-back rate cuts.

However, in the meantime, there are the Middle East and global trade uncertainties to contend with and that will contain monetary policy-related sterling moves over the short term.

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