Mitsubishi UFG Comments on Sterling With Possible Further Bank of England Rate Cuts, Easing U.K. Fiscal Concerns

06:39 AM EDT, 10/23/2025 (MT Newswires) -- Sterling (GBP) weakened sharply on Wednesday initially after the release of the much weaker United Kingdom consumer price index report for September, although a large part of the sell-off was quickly reversed, said MUFG.

GBP/USD initially dropped sharply from around 1.3385 and hit a low of 1.3311 before rebounding back towards 1.3350, wrote the bank in a note to clients. The size of the initial GBP/USD sell-off was similar to the last time there was such a big downside inflation surprise back in December 2023, when on that occasion, GBP/USD fell by 0.4% in the first 30 minutes after the CPI report was released.

The latest U.K. CPI for September revealed that inflation came in well below the Bank of England's forecasts from the August Quarterly Inflation Report. The BoE was expecting headline inflation to peak at 4.0% but it came in at 3.8%. Services and food inflation also undershot their expectations by 0.3ppt and 0.5ppt point, respectively.

The weaker food inflation reading is important as the BoE had been emphasizing recently that it was concerned that higher food inflation was increasing the risk of more persistent inflation in the U.K., pointed out MUFG.

The report supports MUFG's decision to hold on to its call for the BoE to cut rates further this year in December. The bank had assumed that softer inflation and wage growth, alongside fiscal tightening measures to be announced in the Fall Statement, would tip the balance in favor of a cut by the December MPC meeting.

The U.K. rate market has now moved to price in a higher probability of a December rate cut and is currently pricing in around 18bps, up from 11bps at the start of this week, stated MUFG. The bank can't completely rule out the possibility that the BoE performs a quick policy u-turn and sticks to the quarterly pace of rate cuts by lowering rates next month after communicating recently over the need to slowdown the pace of cuts.

MPC member Dave Ramsden could join Swati Dhingra and Alan Taylor in voting for a cut next month. Governor Andrew Bailey could prove to be an important swing voter, as Sarah Breeden has always voted the same way.

However, the sharp drop in U.K. yields this month has had only a modest negative impact on sterling, noted the bank. The two-year Gilt yield has dropped by around 25bps.

The relative resilience of sterling could reflect support from an easing of U.K. fiscal concerns ahead of the Fall Statement. The 30-year Gilt yield has dropped even more sharply by around 35bps and fully reversed the summer sell-off, it added.

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