Deutsche Bank’s Sanjay Raja argues January’s UK inflation data will be uncomfortable for the Bank of England, with services and core CPI overshooting MPC projections. The bank still expects two rate cuts in 2026, in March and June, but notes that stronger price momentum could force a slower, though ultimately deeper, easing cycle.

MPC faces tougher inflation trade-off

"Overall, for the Bank of England, the January report will make for a slightly uncomfortable reading. While price momentum slowed, it did not slow as fast as the MPC anticipated. Headline CPI was nearly a tenth stronger than the BoE projected, with services CPI running nearly 0.25pp higher to start the year."

"What does this mean for the BoE? A March rate cut is not a slam dunk. But given the deteriorating labour market, we maintain this as our basecase."

"We stick to our longstanding call for two more rate cuts this year (March, June) and we maintain our view that risks are skewed to slower but deeper rate cuts."

"Modelled estimates of inflation expectations suggest some continued drop-off in the coming months, which will be encouraging for the MPC."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)