06:56 AM EST, 11/04/2024 (MT Newswires) -- The continued fallout from last week's British budget will remain in focus this week with the Bank of England holding a Monetary Policy Committee meeting, said Mitsubishi UFG.

Sterling staged a modest rebound on Friday after the Gilt market showed some encouraging signs of stabilizing at higher levels, wrote the bank in a note to clients. The 10-year Gilt yield failed to break above the high from Thursday set at 4.53% although it remains around 20bps higher than prior to the Budget announcement.

It has helped EUR/GBP to drop back below the 0.8400 level after hitting a high on Thursday at 0.8448, stated MUFG.

The Gilt market sell-off has been driven in part by the hawkish repricing of BoE rate cut expectations ahead of this week's MPC meeting, pointed out the bank. The BoE will take into consideration the government's updated fiscal plans for the first time which includes more front-loaded government spending which is only partially offset by the higher taxes mainly in the form of higher employer national insurance contributions.

While MUFG would expect the government's updated fiscal plans to make the BoE more cautious over further monetary easing, the bank doesn't think it will prevent the BoE from lowering rates for the second time this week.

Inflation and wage growth surprised to the downside over the past month which should give the BoE more confidence that inflation continues to slow towards their target. It could be another close vote similar to in August when five versus four MPC members voted for the first 25bps cut in the easing cycle.

However, MUFG is no longer expecting the BoE to signal that it could speed up the pace of rate cuts in the near term by opening the door to back-to-back cuts in December as well. The government's updated fiscal plans are more supportive of the BoE sticking to a gradual rate cut guidance at this Thursday's MPC meeting, added MUFG.

A slower pace of BoE rate cuts should support a stronger sterling by keeping rates on offer in the U.K. relatively higher for longer than in other major economies, according to the bank. The main downside risk for sterling is posed by a continued sell-off in the Gilt market especially if it starts to be driven more by the long end of the curve reflecting a further loss of confidence in the U.K. government's fiscal consolidation plans.