The UK Retail Price Index (RPI) fell 0.5% month on month in January. This was below the forecast 0.4% fall.
January’s -0.5% RPI drop is larger than the -0.4% we expected. This suggests UK inflation pressures are easing faster than anticipated. It strengthens the case for the Bank of England to consider interest rate cuts sooner than markets previously priced.
Rates Market Implications
We should now watch interest rate swaps and SONIA futures, as the front end of the curve is likely to rally. The market is pricing in almost a full percentage point of cuts by 2026. That is a big jump from the 75 basis points priced in last week. This data also supports the view that the first cut could come as early as May.
For currency traders, weaker inflation is negative for the British pound. The case to short GBP versus the dollar is stronger, especially if the Federal Reserve cuts rates more slowly. This also shows up in options: the premium on three-month GBP/USD put options is up more than 5% this morning.
This backdrop is usually positive for UK equities, which can benefit from lower borrowing costs. The FTSE 250, with more exposure to the domestic UK economy, may outperform the more global FTSE 100. We would consider buying FTSE 250 call options to gain upside while limiting risk.
It is also worth noting that this report follows the very weak 0.1% GDP growth figure for Q4 2025. Together, the data points to a slowing economy where inflation is no longer the main concern for policymakers. That is a clear shift from most of last year’s narrative.
Key Takeaways For Markets
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