Bank of England Rate Cuts Pushed Back After CPI Surprise — January 23
Bank of England rate cut hopes took a hit after UK inflation December rose to 3.4%, driven by airfares and tobacco duty. Markets have priced out a BoE February meeting move, pointing to April or later. For Australian investors, this affects GBP/AUD, UK bond yields, and property financing linked to the UK. We outline what changed, why it matters, and how to position portfolios while we wait for clearer guidance from the Bank of England and fresh data prints.
Why the CPI surprise matters for rate timing
Airfares and tobacco duty were the key one-off drivers behind the UK inflation December rise to 3.4%. That is the first monthly uptick in five months, according to the BBC. Core pressures look stickier than hoped, keeping services inflation in focus. While one-offs can fade, policymakers want more evidence that price pressures are cooling before a Bank of England rate cut can be justified.
Traders quickly pushed back the timeline for easing. Pricing now implies little chance of a BoE February meeting cut, with April or later seen as more likely, per Yahoo Finance. Gilt yields rose at the short end, and GBP firmed. This shift tightens financial conditions, which can weigh on rate-sensitive UK assets and delay a Bank of England rate cut further if inflation stays sticky.
Implications for UK mortgage rates and borrowers
Lenders had been trimming offers as swap rates fell in late 2024. The CPI surprise lifts swaps, so UK mortgage rates could steady or tick up in the near term. Banks may wait for more data before deeper cuts. Borrowers with refinancing due soon might lock earlier than planned to reduce risk while the Bank of England rate cut outlook remains uncertain.
Households on variable or tracker deals move with bank funding costs. If gilt and swap rates stay higher, monthly payments can stay elevated for longer. While a Bank of England rate cut later in 2025 remains possible, timing matters. A few extra months at current levels can strain cash flow, so building buffers and comparing products now makes sense.
What this means for AUD investors with UK exposure
A delayed Bank of England rate cut can support GBP against AUD if UK yields stay firm. That can lift the AUD cost of unhedged UK assets. Bond investors may reassess duration exposure to gilts until inflation softens. We prefer a staggered approach to adding gilt duration, using hedges to manage GBP/AUD swings while the inflation path is unclear.
For ASX portfolios with UK revenue exposure, higher UK rates can slow demand and pressure margins. We look for companies with pricing power and low leverage. Diversifying across sectors and mixing rate-sensitive names with defensives can help balance risk. If using UK equity ETFs, consider partial currency hedging while the timeline for a Bank of England rate cut remains pushed back.
Key dates and data before the BoE February meeting
We will watch services inflation, pay growth, and PMI trends. Any renewed drop in core inflation would rebuild confidence. A stable energy picture helps, but wage momentum is key for the Bank. If these cool, the case for a Bank of England rate cut strengthens. If not, the first move likely slips closer to mid year.
Base case: No move at the BoE February meeting, with guidance that cuts need clearer disinflation. If March and early April data soften, April becomes viable for a small cut. Upside inflation surprises could defer the first Bank of England rate cut to mid 2025, keeping yields firm and UK mortgage rates sticky for longer.
Final Thoughts
For Australian investors, the message is simple. The inflation surprise pushes back the first Bank of England rate cut and tightens UK financial conditions. We should expect steadier or slightly higher UK mortgage rates near term, a firmer GBP if yields stay up, and choppy gilt pricing until core inflation cools. Practical steps include reviewing GBP/AUD hedges, staggering bond duration adds, and stress testing UK-linked cash flows. Property buyers with UK exposure may lock financing earlier to manage risk. Stay data driven, track services inflation and wage growth, and be ready to adjust if April odds for a cut improve on softer prints.
FAQs
Why did UK inflation rise in December?
Airfares and tobacco duty were the main one-off drivers behind the UK inflation December uptick to 3.4%. Services costs also remain sticky. While these factors can fade, the Bank wants more evidence of cooling core pressures before backing easier policy.
Is a BoE February meeting rate cut now off the table?
Markets see a very low chance of a BoE February meeting cut. The base case has shifted to April or later, depending on services inflation, wage growth, and PMIs. Softer data could bring forward easing, while sticky prints would push it back.
How could this affect UK mortgage rates?
The surprise inflation print lifted swap rates, so banks may pause recent trims to fixed offers. UK mortgage rates could steady or edge higher near term. If inflation cools again, lenders can resume cuts, but timing depends on data and funding costs.
What should Aussie investors with UK exposure do now?
Review GBP/AUD hedging, stagger any increases in gilt duration, and stress test UK-linked cash flows. For equities, balance rate-sensitive names with defensives and firms with pricing power. Property buyers tied to the UK may consider locking rates earlier to manage risk.
Disclaimer:
The content shared by Meyka AI PTY LTD is solely for research and informational purposes. Meyka is not a financial advisory service, and the information provided should not be considered investment or trading advice.
