Investors have effectively written off the prospect of a Bank of England interest rate cut in February after UK inflation rose more than expected in December, shifting expectations towards April at the earliest for the next easing of borrowing costs.
The headline annual rate of inflation climbed to 3.4% in December, up from 3.2% in November, according to the Office for National Statistics data. The increase marked the first rise in the consumer price index since July and was slightly above city expectations.
The rise was largely driven by higher tobacco duties that came into force at the end of November following the later-than-usual autumn budget. Annual inflation for tobacco products jumped from 4.2% to 6.5%, while alcohol and tobacco prices overall rose by 1% between November and December.
Transport costs also contributed, with air fares surging by 28.6% in December as festive travel and school holidays pushed up demand.
The data all but rules out an interest rate cut at the BoE’s next policy meeting in early February, with interest rates widely expected to remain at 3.75%.
Peter Stimson, director of mortgages at lender MPowered, said the prospect of a February cut was “fading faster than many people’s new year gym attendance”.
He added: “As swap rates held steady in the first weeks of January, many of the biggest lenders started 2026 by shaving their fixed interest rates in an effort to steal a march on each other. That rate-cutting momentum could now stop in its tracks and the great deals we’ve seen in recent days may be short-lived.
“With core CPI unchanged at 3.2% and a material jump in the headline figure to 3.4%, inflation is still stubborn. While the overarching trend is downward, the timing is proving tricky.”
“All things being equal, the Bank of England is likely to push its next base rate cut back to April or June at the earliest.”
Read more: UK inflation rises for first time in five months in December
Core inflation, which strips out volatile food and energy prices and is often seen as a better guide to underlying pressures, remained at 3.2% in December. Services inflation, which is closely watched by the central bank, edged up to 4.5% from 4.4% in November, broadly in line with analysts’ forecasts.
Investors were largely unmoved by the data, with sterling and market expectations for interest rates little changed. Bets on rate cuts later this year were maintained, amid market confidence that inflation will continue to ease despite short-term volatility.
“Although the uptick is larger than expected, for now it’s a speed-bump, rather than an indication we are veering off course on the road to price stability,” said Adam Deasy, an economist at PwC.