Inflation declines becoming more evident in the UK. Economists at MUFG analyze the BoE policy outlook and its implication for the British Pound (GBP).

More meaningful declines in inflation over the coming months

The OIS UK curve remains excessive in our view with still a large 130 bps of tightening priced through to the turn of the year. With that likely to adjust lower as the markets see inflation come down and the BoE not needing to be so aggressive, the scope for further GBP strength could be limited.

Falling food prices will have the biggest impact on short-term inflation expectations and the drop in food inflation will coincide with the 17% cut in utility bills with the OFGEM price cap reduction effective 1st July. The developments should mean we see more meaningful declines in inflation over the coming months which leads the market to question the extent of BoE rate hikes required going forward. 

We continue to see two more hikes rather than the five priced which will remove some of the current yield support for the Pound.