Following a rise in U.K. inflation in December, UBS now anticipates the Bank of England will delay its planned interest rate cuts. Consumer price inflation increased to 3.4% year-on-year, exceeding expectations. This shift comes as the central bank navigates a complex economic environment. The market is sensitive to any signs of persistent inflation.

UBS forecasts the BoE will hold rates steady in February, with the initial 25 basis point cut now expected on March 19, followed by another in June. The delay stems from rising food prices. While core inflation remained stable, the overall trend suggests a slower easing of monetary policy. Investors are closely watching wage growth.

Wage growth continues to moderate, though the labor market remains tight. The unemployment rate is at its highest level since 2020. The BoE’s preferred measure of private sector regular pay also eased. Market expectations are cautious, with limited probability of a February cut. The central bank is signaling it will proceed carefully.

Looking ahead, UBS projects inflation to drop to 3% in January. A more substantial decline is expected in April, potentially reaching the BoE's 2% target. This outlook will be key for investors. Any further adjustments to the rate cut timeline will be driven by the incoming inflation data.