Synopsis:
MUFG expects the BoE to hold rates steady at this week’s March meeting, with markets still pricing in the next rate cut for May and another in August. However, uncertainty remains over whether rates will fall below 4.00% by year-end, keeping UK yields elevated relative to other major economies and supporting GBP strength. While UK growth momentum has improved, stubborn services inflation and wage pressures could make further rate cuts more difficult heading into summer, especially with inflation expected to temporarily rise to 4.0%.
Key Points:
1️⃣ BoE to Hold Rates, Next Cut Expected in May 🏦
- Markets price in 19bps of cuts by May and 44bps by August.
- Less confidence that rates fall below 4.00% by year-end, keeping UK yields elevated.
2️⃣ UK Growth Improving Despite Soft January GDP 📊
- UK economic momentum strengthening since late 2024.
- Friday’s UK GDP report for January was weaker, but broader data remains positive.
3️⃣ Sticky Services Inflation & Wage Growth May Slow BoE Cuts 📈
- Inflation expected to temporarily rise to 4.0% in the summer, complicating rate-cut plans.
- This could make continued BoE easing more difficult beyond mid-year.
4️⃣ GBP Remains Attractive, But Equity Sell-Off Poses Risks 💷
- Higher UK yields provide relative support for GBP.
- A deeper global equity market sell-off is the biggest downside risk for GBP.
Conclusion:
MUFG sees the BoE holding rates in March, with GBP supported by higher UK yields and relative policy caution. While markets expect rate cuts in May and August, sticky inflation and wage pressures may slow the BoE's pace of easing, keeping GBP resilient unless global risk sentiment deteriorates significantly.
