Summary: MUFG analyzes the latest UK growth data and concludes that the Bank of England (BoE) will likely maintain current interest rates, considering the subdued growth and decelerating inflation.

Key Takeaways:

• August Growth: UK's August monthly GDP showcased a modest 0.2% expansion. This followed a steeper contraction of -0.6% in July, which had been revised downward.

• BoE's Forecast: Initially projecting a 0.4% growth for Q3, the Bank of England recently curbed its expectations, bringing it down to 0.1%. Given the August GDP report, even this may be overly optimistic.

• Sectoral Breakdown: August saw the service sector growing by 0.4%. However, the manufacturing and construction sectors continued their decline, contracting by -0.8% and -0.5% respectively.

• Inflation & Rate Outlook: The presence of weak growth coupled with signs of a slowdown in inflation strengthens MUFG's hypothesis that the BoE will refrain from hiking rates further this year. They anticipate the policy rate to peak at 5.25%.

• Market Confidence: The UK rate market, seeing only 10bps of hikes priced in by December's MPC meeting, aligns with this sentiment.

• Impact on Pound: Between mid-August and the end of September, the pound's performance was affected by the drastic reduction in BoE rate hike expectations. However, its decline has stabilized in the beginning of this month.

In Conclusion: MUFG's analysis of the latest growth indicators from the UK suggests that the BoE will maintain its cautious approach and is unlikely to introduce rate hikes in the near future.