06:33 AM EDT, 08/27/2024 (MT Newswires) -- Bank of England (BoE) Governor Andrew Bailey was at Jackson Hole last week and there was certainly a more cautious tone to the speech from Bailey in contrast to United States Federal Reserve Chair Jerome Powell's speech, said MUFG.

However, that is of course understandable, wrote the bank in a note to clients. There was a far larger energy price shock in Europe than in the US and the problem in Europe was more supply, less demand-related while in the US, demand was a bigger influence which has allowed the Fed to communicate a clearer message on rate cuts given the signs of weakening labor market demand.

In Europe, the BoE and the European Central Bank (ECB) have already cut rates and as such there is perhaps less urgency, stated MUFG.

Governor Bailey's statement that it is "too early to declare victory" over inflation adding that inflation wasn't yet back at target on a sustained basis and that policy will need to remain "restrictive for sufficiently long" highlighted those concerns, pointed out the bank. However, there were important additional comments underlining the progress being made continues.

Bailey crucially stated that second-round inflation effects "appear to be smaller than expected" and that the BoE had seen a "revision down in our assessment of that intrinsic persistence" of inflation.

The comments had no big impact on market expectations and the BoE remains on course to cut again at the November meeting, added MUFG. Just 6bps of cuts are priced for the September meeting. Given the 5-4 vote a September cut the bank sees a September cut as very unlikely.

Still, there was further good news on Tuesday in the data with the BRC revealing deflation has returned to the high street with a 0.3% drop in shop prices in August from a year earlier, the first drop in nearly three years as retailers introduced discounts to shift inventory after weak summer demand.

Sterling (GBP) continues to lag in G10 this month -- the second-worst performer -- but remains the top-performing currency this year, according to MUFG. The faster drop in inflation coupled with the expected caution from the BoE -- suggested again by Bailey in Jackson Hole -- leaves the BoE with the expected most attractive real policy rate across G10 by the middle of next year and this fact will continue to act as a support for sterling.

MUFG will be adjusting higher its GBP forecast profile in the next forecast update to be published on Monday in the Foreign Exchange outlook.