Mitsubishi UFG Says Bank of England in A "Bind" as Outlook Continues to Deteriorate

06:52 AM EDT, 08/07/2025 (MT Newswires) -- Since the start of the second half of this year, sterling (GBP) has been the worst-performing G10 currency and MUFG sees no reason for any near-term turnaround in this underperformance.

The bank remains long EUR/GBP.

Thursday, the key macro event is the Bank of England Monetary Policy Committee (MPC) meeting, which will also include the release of the latest quarterly Monetary Policy Report with updated forecasts. MUFG fully expects the MPC to deliver on the fully priced and widely expected 25bps cut in Bank Rate to 4.00%.

As a consequence, the market impact will come from signs of any communication shift and/or changes in the voting composition and to a lesser degree any surprises in the forecasts.

The bank sees the divisions within the MPC being maintained as there has been no dramatic change in the macro backdrop to alter individual MPC members' thinking on the economy. As such, like in May when the MPC last cut, MUFG could well see a 5-2-2 vote with Huw Pill and Catherine Mann opposing any reduction, while the two doves -- Swati Dhingra and Alan Taylor voting to cut by a larger 50bps.

With the MPC still likely divided, the bank predicts no reason for any dramatic change in the communication from the MPC and as such MUFG expects the key guidance that "a gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate" will be maintained in the statement.

While inflation has ticked up by more than what the BoE expected in May -- 3.6% year over year versus 3.4% -- the rate of annual wage growth has slowed a little more than expected and the OIS market shows that expected market interest rates are modestly higher than when the last MPR was published in May.

That should be grounds for the BoE showing this pick-up in inflation reversing and that by the two- and three-year periods of the forecast inflation will be close to the 2.0% target. In May, the projections showed 1.9% for both periods. The bank also estimates the MPC statement to include the reference relating to the labor market that "a margin of slack has opened up over time" to be maintained. The jobs data in July for June did revise away some of the labor market weakness, but there is enough evidence that the market is loosening.

What markets probably won't hear much about is the deteriorating fiscal position, added MUFG. The NIESR on Wednesday estimated a huge 51 billion pounds fiscal hole that will need filling to only get back to having a spare 10 billion pounds of headroom. This is a huge requirement and will be politically difficult and would certainly potentially open up scope for the MPC to ease policy more quickly, given the disinflationary consequences of such a large tax hike.

Such a gap would require a 5ppt increase in the basic and higher rate income tax rates, although that's unlikely. Investors may get some hints from Governor Andrew Bailey about a slower pace of quantitative tightening (QT) ahead, with the MPC scheduled to provide details of its plans for the year ahead in September.

MUFG forecasts sterling to continue to underperform and it sees the best avenue to shorting sterling being via the euro (EUR). Tax hikes are a certainty in the fall, which is likely already shaping consumer and business behavior. Greater appetite for savings amongst households and a reluctance to hire and invest by companies seem set to continue.

Wednesday, the United Kingdom Construction PMI fell to a level not seen since COVID-19 -- at 44.3.

MT Newswires does not provide investment advice. Unauthorized reproduction is strictly prohibited.