Synopsis:

MUFG expects the Bank of England (BoE) could become more open to accelerating its pace of rate cuts as domestic growth remains soft and labour market slack builds. While the BoE’s current “gradual and careful” approach implies one cut per quarter, recent developments raise the chance of back-to-back cuts later this year.

Key Points:

• Dovish Tilt Emerging:
  • The latest 6-3 MPC vote shows a clear risk bias towards a faster pace of easing if incoming data remains soft.
  • The BoE cited the potential for labour market slack to increase, which would help moderate wage growth pressures.

• External Risks Fading:
  • Middle East tensions, flagged as an inflation risk, have diminished lately, which could strengthen the case for quicker easing if domestic conditions remain weak.

• Focus on PAYE and Energy Prices:
  • If the PAYE jobs data continues to show job losses and energy prices stay contained, the conditions would be in place for a faster pace of rate cuts.

• QT Policy May Also Ease:
  • Governor Bailey indicated that the pace of quantitative tightening (QT) could be slowed, with a decision expected at the September MPC.
  • Previous debt market conditions and sell-offs will factor into the BoE’s QT recalibration.

• FX Implications:
  • MUFG sees continued GBP underperformance versus EUR, while GBP/USD gains are likely to be capped by the increased risk of a faster easing cycle.

Conclusion:

MUFG expects the BoE could shift away from its gradual pace and adopt back-to-back cuts as early as August and September if growth and jobs data remain soft. This dovish tilt would weigh on GBP, especially versus the euro, while the BoE’s likely slowdown in QT would reinforce the overall dovish bias.