Expectations that the Bank of England would cut interest rates sooner rather than later are optimistic amid a rise in U.K. inflation, money managers said.
CPI inflation rose in December to 4%, vs. 3.9% in November — the first increase since February 2023, the Office for National Statistics said on Jan. 17. The BOE's monetary policy committee sets a policy to meet a 2% inflation target.
The MPC pressed pause on interest-rate rises in September, holding steady at 5.25% after 14 consecutive hikes since December 2021. CPI inflation was 5.4% in December 2021, and peaked at 11.1% in October 2022.
"It will probably take a while, and quite a bit more evidence, for the MPC to feel convinced that inflation is going to sustainably return to 2%," said Melanie Baker, senior economist at Royal London Asset Management, in an emailed comment. "For now, I still have the first MPC rate cuts in my forecasts pencilled in for the second half of this year rather than the first half."
Charles Hepworth, investment director at GAM Investments, said in a separate emailed comment that the inflation forecast had been 3.8%, adding that core inflation also increased, to 5.1% vs. a forecast of 4.9%.
"It now seems that hopes for early cuts in rates from global central banks were a tad optimistic," he said.
A 25 basis points cut had been priced in for May, said James Lynch, fixed income investment manager at Aegon Asset Management. This has now moved to 16 basis points after the publication of the data.
Further, the market had been expecting 170 basis points of cuts for the whole of 2024, as of Jan. 1. Now, that expectation is 115 basis points, he said.
