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UK Inflation Set to Decline, but Policy Uncertainty Remains

The upcoming UK CPI report will be a key moment for markets and policymakers, as expectations point to a modest decline in inflation. The headline year-on-year CPI is forecast to ease to 2.9% from 3.0%, while core inflation is expected to slip to 3.6% from 3.7%.

Despite this expected moderation, the prior release showed an unexpected rise in price pressures, with headline CPI climbing to 3.0% from 2.5%, the highest annual rate since March 2024. Additionally, core inflation jumped to 3.7% (prev. 3.2%), while services inflation surged to 5.0% (prev. 4.4%), though this was still below the Bank of England’s forecast of 5.2%.

Looking forward, Pantheon Macroeconomics warns that this report may be the ‘calm before the storm,’ with inflation expected to climb to 3.5% in April due to price resets in key sectors such as food, goods, and services. If inflation remains stubbornly high, expectations for Bank of England rate cuts could be delayed further.
 

BoE Holds Rates as Inflation Risks Persist

At its March 2025 meeting, the Monetary Policy Committee (MPC) voted 8–1 to keep the Bank Rate unchanged at 4.5%, with one member preferring a 25bps cut to 4.25%.

This decision reflects the MPC’s cautious approach, as inflation progress remains uneven. While the BoE acknowledges significant disinflation over the past two years, it has maintained a restrictive policy stance to prevent lingering inflationary pressures.

Key takeaways from the BoE’s March statement:
 UK GDP growth has been slightly stronger than expected, but business surveys indicate weakness in hiring and investment.
 Inflation remains above target, with price pressures easing slower than expected.
 Global trade uncertainty has risen, particularly after recent US tariff announcements, which have prompted retaliatory measures from other countries.
 The BoE expects inflation to climb to 3.75% by Q3 2025, before gradually falling back toward target.
 

The BoE’s Policy Dilemma: When to Cut Rates?

The MPC’s evolving stance suggests that monetary policy easing will be gradual. The committee has emphasized that the timing of rate cuts will depend on incoming data, particularly whether demand slows relative to supply.
 

Market Implications & Outlook

 If CPI comes in softer than expected (headline CPI below 2.5%):

• GBP weakness, as rate cut expectations build.
• Gilt yields decline, reflecting a more dovish BoE stance.
• Equities may gain, as investors price in lower borrowing costs ahead.

 If CPI surprises to the upside (headline CPI above 3.5%):

• GBP strength, as markets push back BoE rate cut expectations.
• Gilt yields rise, reflecting persistent inflation risks.
• Equities could see downside pressure, as rate cut hopes fade.

Bottom Line: While inflation is expected to decline, the outlook remains uncertain. If inflation stays elevated or rises further in April, the BoE could be forced to maintain restrictive policy longer than markets expect. Investors should closely monitor CPI data and BoE commentary for signals on the timing of future rate cuts.

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