Deutsche Bank said the UK’s January inflation data is likely to be difficult for the Bank of England. Services CPI and core CPI both came in above the Monetary Policy Committee’s (MPC) forecasts. Headline CPI was almost 0.1 percentage points higher than expected. Services CPI was about 0.25 percentage points higher at the start of the year.
The report said price momentum has eased, but not as fast as the MPC expected. That makes a March rate cut less certain.
Inflation Surprise Complicates Policy Outlook
Deutsche Bank still expects two rate cuts, in March and June. It said stronger price pressures could slow the pace of cuts, but lead to a larger total reduction over time.
The note also pointed to a softer labour market. It said model-based measures of inflation expectations suggest inflation could keep falling in the next few months.
The January inflation figures will leave the Bank of England uneasy. Services inflation came in hotter than expected at 5.5%, almost a quarter-point above what the MPC had pencilled in. That makes the path ahead harder and raises doubts about an early rate cut.
Markets have already adjusted. In overnight index swaps, the implied probability of a March cut has fallen from over 75% last week to around 40% today. For traders, the main risk now is that the Bank holds rates steady for longer than expected.
Pound Support And Curve Implications
This needs to be weighed against a cooling labour market. The latest data shows unemployment rising to 4.5% and wage growth slowing. The push and pull between sticky inflation and a weaker economy adds uncertainty. It may also increase volatility in short-term interest rate futures. In this kind of market, options strategies that benefit from price swings may work better than trades that rely on one clear direction.
The reduced chance of a near-term rate cut supports the pound. This is especially true versus currencies where central banks are more clearly signalling cuts. In 2025, sterling often moved quickly as interest rate gaps shifted. A similar pattern could return, supporting long GBP positions.
Overall, the view is shifting toward a slower start to easing, but potentially deeper cuts later. This could flatten the yield curve. Short-term rates may stay high, while longer-term rates may price in larger cuts over time. It highlights the difficult trade-off the MPC now faces.
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