UK inflation unexpectedly rose to 3.4% in December, beating forecasts and complicating the Bank of England's path to lower rates. The uptick from November's 3.2% was driven by tobacco duty increases and the end of Black Friday discounts, pushing back expectations for an immediate interest rate cut at the February meeting.

Economists are now reassessing the timing of the easing cycle. Capital Economics no longer sees a February cut, while Deutsche Bank and ING still project inflation will fall to the 2% target by spring. The debate hinges on whether this rebound is temporary or signals persistent price pressures, especially in services and food.

Markets will watch the BOE's February decision closely. If hiring weakens, a March cut remains possible, potentially followed by another in June. Investors should monitor upcoming inflation prints and wage growth data, as the central bank's next move will significantly influence borrowing costs and the broader economic outlook.