The latest UK inflation data came in below expectations, reinforcing the view that the Bank of England will keep interest rates on hold for an extended period, according to a research note from TD Securities published Wednesday.
UK consumer price index (CPI) rose 2.5% year-on-year in December, down from 2.6% in November and below the 2.6% consensus forecast. Core CPI, which excludes volatile food and energy prices, also softened to 3.2% from 3.5%, undershooting the 3.4% expected by economists.
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Why the data matters for the BoE’s next move
The Bank of England has held its benchmark rate at 4.75% since August 2024, after cutting from a peak of 5.25%. Policymakers have been cautious about easing too quickly, wary of persistent services inflation and wage growth. But the December CPI report provides some breathing room.
TD Securities analysts noted that the softer headline and core prints reduce the urgency for the BoE to act. “The December CPI release tilts the balance of risks toward a longer hold,” the note said. “We expect the Monetary Policy Committee to remain on hold at its March meeting, with the first rate cut unlikely before the second half of 2025.”
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The report highlighted that services inflation, a key metric for the BoE, eased to 4.4% from 5.0%, the lowest reading since March 2022. While still above the central bank’s comfort zone, the decline suggests that domestic price pressures are gradually moderating.
Market implications and what to watch next
The softer CPI data weighed on the British pound, which fell 0.3% against the US dollar to $1.2430 following the release. Gilt yields also declined, with the 10-year yield dropping 5 basis points to 3.82%, as traders trimmed expectations for near-term rate cuts.
TD Securities expects the pound to remain under pressure in the near term, with GBP/USD likely to trade in a $1.22–$1.26 range until the BoE provides clearer guidance on its policy path. The firm also noted that the market is pricing in roughly 50 basis points of cuts by year-end, which may prove optimistic if inflation proves stickier than expected.
The next key data point for the BoE will be the January CPI report, due February 19, followed by the February labor market data. The Monetary Policy Committee’s next decision is scheduled for March 20, when it will also release updated economic forecasts.
Investors should also watch for any shifts in rhetoric from BoE Governor Andrew Bailey and other MPC members in upcoming speeches. A more dovish tone could accelerate expectations for rate cuts, while a cautious stance would reinforce the prolonged hold narrative.
