The bank contends that a halt in Bank of England (BoE) rate increases is necessary to preserve recently gained foreign trust in UK assets and to prevent additional harm to the fragile housing market.
MUFG concurs with the BoE’s assessment that Brexit has boosted economic structural inflation, which will likely cause the Pound to fall over the medium run.
Sticky inflation will further raise the possibility that the BoE would have to tighten monetary policy excessively in order to manage inflation, which would further harm the housing market and reduce foreign investment in UK assets.
Brexit Worsens the UK’s Inflation Issue
The bank believes that one key factor harming the underlying Sterling outlook is the weak performance of underlying inflation.
According to the most recent OECD figures, inflation in the OECD region has decreased by 1.4% since its high, but only by 0.4% in the UK.
The UK has seen more inflation since 2016 than the US, the Eurozone, and Japan, according to MUFG.
If fears about global inflation rise once further, the pound will be vulnerable.
Peak BoE Rate Hopes are Increased Foreign Bond Demand
Hopes that inflation has peaked and that the Bank of England can stop raising rates are a key factor in the increase in foreign demand for gilts.
However, there is a chance that further gilt sales will occur if concerns over rising interest rates pick up again.
Sector of Housing a Key Vulnerability
The UK RICS housing survey has revealed the worst 6-month decline in survey history, according to MUFG, and the most recent data is expected tomorrow.
If loan rates are driven any higher, the housing market will be even more at risk.
The BoE should ideally take a break; if global inflation becomes more difficult and the BoE is compelled to tighten more than necessary, the GBP will underperform.