Persistent inflation in the UK, driven by weak business investment and lasting pandemic-era shifts in labor markets, is eroding expectations of near-term monetary easing. The Bank of England's cautious stance is now casting doubt on broader G10 rate-cut momentum.
- UK inflation remains above 3%, with core services inflation at 5.2%
- Bank of England has signaled delay in rate cuts, citing structural economic constraints
- UK 10-year government bond yields up to 4.62%
- GBPUSD at 1.2830, EURGBP at 0.8590, reflecting stronger currency expectations
- Market odds for a BoE rate cut by March 2026 now at 30%
- Business investment remains sluggish, contributing to capacity constraints
The Bank of England’s recent assessment has highlighted that structural weaknesses in the UK economy are keeping inflation elevated, despite global trends signaling a shift toward monetary easing. Governor Andrew Bailey pointed to ongoing challenges in business investment and enduring changes in work patterns post-pandemic as key factors constraining economic capacity. These dynamics are preventing a meaningful slowdown in price pressures, undermining the case for rate cuts in the near term. UK 10-year government bond yields have risen to 4.62%, reflecting increased expectations of prolonged high rates. The GBPUSD exchange rate has strengthened to 1.2830, while EURGBP has dipped to 0.8590, underscoring market skepticism about a dovish shift in UK monetary policy. These moves contrast with declines in yields across other G10 economies, where rate-cut bets have gained traction. The Bank of England’s commitment to data-dependent policy has tightened market positioning ahead of its December 18 meeting. With inflation still above 3% and core services inflation holding at 5.2%, policymakers are signaling that any easing would be delayed until clear evidence of sustained disinflation emerges. This stance is likely to pressure short-term interest rate swaps, with markets now pricing in only a 30% probability of a rate cut by March 2026. The divergence in monetary policy trajectories is reshaping asset valuations. Financials and real estate sectors in the UK face higher financing costs, while consumer spending may be constrained by elevated borrowing rates. Equity markets, particularly UK-focused indices, are under pressure as the risk premium rises. Investors are now reassessing the timing of global rate cuts, with G10 FX and bond traders adjusting hedges accordingly.