The U.K.’s annual inflation rate rose more than expected in December, strengthening the case for the Bank of England to pause further interest rate cuts at its next policy meeting in early February.
According to official data, consumer price inflation climbed to 3.4% year on year, higher than market expectations of 3.3% and up from 3.2% in November. The increase comes after inflation had fallen sharply from 3.6% in October, raising concerns that progress toward the central bank’s 2% target may be stalling.
On a monthly basis, prices rose 0.4% in December, reversing a 0.2% decline in November. Core inflation, which excludes volatile food and energy prices, increased 0.3% month on month and stood at 3.2% annually, unchanged from the previous month.
While inflation is well below the 11.1% peak recorded in 2022 following Russia’s invasion of Ukraine and the resulting surge in energy prices, it remains persistently above the Bank of England’s target and higher than several Group of Seven peers.
In December, the Bank of England’s Monetary Policy Committee voted 5–4 to cut interest rates by 25 basis points, with Governor Andrew Bailey casting the deciding vote. This brought the benchmark rate down to 3.75% from 4%, the lowest level since February 2023.
However, economists believe the latest inflation data may prompt policymakers to hold rates steady at their February 5 meeting. Analysts at Capital Economics said the rebound in inflation makes an imminent rate cut less likely, though they still expect inflation to ease further in coming months.
Capital Economics noted that a projected fall in inflation toward 2% by April could reopen the door for rate cuts later in the year, potentially bringing borrowing costs down to 3.0% in 2026.
For now, the unexpected uptick in inflation adds another layer of caution for U.K. policymakers navigating a delicate balance between supporting growth and ensuring price stability.
