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MUFG talks about the likelihood of the Bank of England (BoE) implementing a stricter monetary policy in response to an unsettling inflation report in the UK.

The text can be summarized by the following main points:

The Consumer Price Index (CPI) for May in the UK experienced a higher than anticipated increase of 0.7% compared to the expected 0.4%. This led to the annual inflation rate to remain at 8.7%, instead of decreasing to the expected 8.4%. Furthermore, core inflation, which excludes the fluctuating prices of food and energy, rose to a significant high of 7.1% annually.

MUFG points out that the BoE is in a difficult situation. The recent spike in inflation may suggest that a more forceful interest rate increase of perhaps 50 basis points could be necessary to contain it. However, implementing such a sudden and drastic hike may cause some to view the BoE’s actions as panicked and a sign that it is unable to manage inflation. This could harm market sentiment.

Initially, MUFG had anticipated a 25bps hike in rates by the BoE, but given the troubling inflation data, they are now leaning towards a 50bps hike. Nonetheless, they recognize that the BoE could still opt for a more cautious approach with a 25bps hike and argue that the aftermath of previous tightening measures will eventually have an impact on inflation.

The British Pound (GBP) could experience a short-term boost if the Bank of England (BoE) takes more forceful measures, according to MUFG. However, the currency’s rise may be restrained as investors evaluate the impact of such strong tightening on economic growth. MUFG anticipates that the GBP/USD rate could reach 1.3000, but the sentiment could be ambiguous due to high inflation and how the BoE’s policies are perceived.

To sum up, MUFG believes that the BoE may increase interest rates more aggressively to combat the rising inflation rates in the UK, but also acknowledges that it is a challenging situation for the BoE. The effect on the GBP will not only depend on how much interest rates are raised but also on how the BoE is perceived to have dealt with the inflation issue.

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