UK markets are pricing about 70 basis points of Bank of England easing in 2026, despite some Monetary Policy Committee resistance. Societe Generale’s economists expect no Bank of England rate cuts this year. Headline CPI was 3% in February, matching both the Bloomberg consensus estimate and the Bank of England’s February projection. The economists note this reading came before an energy price shock.

Near Term Inflation Outlook

They expect higher fuel prices to lift headline CPI to about 3.2% year on year in March. This is around 0.5 percentage points above the Bank of England’s February MPR projection. Inflation is expected to stay around 3–3.5% through 2026. The economists attribute limited follow-on price pressures to economic slack, rising joblessness, and weak consumption reducing firms’ ability to raise prices. Attention this week is expected to turn to second-tier data releases. The March Decision Makers’ Panel survey is expected to provide early evidence of company CPI and wage expectations after wholesale energy prices rose. The market is pricing in significant Bank of England easing, with the SONIA forward curve on March 30, 2026, still reflecting nearly three 25-basis-point cuts this year. We believe this is a mispricing given that inflationary pressures are proving to be persistent. This disconnect between market pricing and economic reality presents a clear opportunity for derivatives traders.

Trade Expression And Market Catalysts

Higher energy costs are a key reason for our view, with Brent crude holding firmly above $85 a barrel through the first quarter of 2026. This has directly contributed to headline CPI ticking up to 3.2% in the latest ONS report for March, which is above the Bank’s earlier forecasts. We expect inflation to remain elevated around the 3-3.5% level for the remainder of the year. While the economy does show signs of slack, this doesn’t automatically trigger rate cuts. Recent labour market data confirmed a slight rise in unemployment to 4.5%, which should help contain wage growth and limit second-round inflation effects. However, with inflation still well above the 2% target, this slack is more likely to keep the MPC on hold rather than compel them to ease policy. Looking back at 2025, markets were rewarding bets on a steady decline in inflation, but that trend appears to have stalled. The most direct way to position for rates staying higher for longer is through short-term interest rate futures. We see value in selling December 2026 SONIA futures, as their price will fall if the market begins to price out the aggressive rate cuts we view as unlikely. Another strategy involves using interest rate swaps to pay a fixed rate against receiving the floating SONIA rate. This position becomes profitable if the BoE does not cut rates as much as the market currently expects, causing the floating rate we receive to be higher than anticipated. It is a straightforward play on the forward curve being too low. This week’s focus will be on second-tier data, which could serve as a major catalyst. The March Decision Makers’ Panel survey is particularly important as it will provide the first real glimpse into how UK firms are adjusting their price and wage expectations after the recent energy price increases. A strong reading here could force the market to quickly reconsider the viability of 70 basis points in cuts. Create your live VT Markets account and start trading now.

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