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    UBS economist notes uncertainty for the Bank of England as UK inflation is likely to decline

    by VT Markets
    /
    Feb 5, 2026
    UBS economist Paul Donovan talks about the uncertainty around the upcoming meeting of the Bank of England. This unpredictability stands in contrast to the more predictable European Central Bank. Donovan notes that issues in data collection led to mistakes in December’s inflation figures. Still, the underlying inflation rate in the UK is likely to decline over time. This drop in inflation might lead to interest rate cuts in 2026. However, UBS does not expect the Bank of England to lower rates right away. Today’s Bank of England meeting highlights this uncertainty as they kept rates steady, even with the trend of falling inflation. The latest Consumer Price Index (CPI) reading for January was 2.8%, continuing the downward shift from the peaks we saw back in 2025. This creates a gap between decreasing inflation and a cautious central bank, leading to opportunities for derivative trading. This indecision is increasing market volatility, which is essential for options traders in the upcoming weeks. Implied volatility for three-month GBP options has risen to 8.5%, showing that the market is anxious about when the first rate cut will happen. This situation suggests that buying options could be a smart move to take advantage of potential price changes around future data releases. We are closely monitoring interest rate futures, as the market now fully expects a 25 basis point cut in the August meeting. However, strong wage growth, recently reported at 5.5%, is keeping the Bank on hold for now. This makes short-term SONIA futures very sensitive to upcoming job and inflation reports. For the moment, the relatively high interest rate is supporting the pound sterling, keeping it strong against currencies where rate cuts are expected sooner. We should be on the lookout for this support to weaken as we approach a UK rate cut, shifting from the steady hold we saw during much of 2025. Any unexpectedly weak economic data could lead to a swift repricing against the pound.

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