Rabobank says the Pound has held up recently, but UK risks are still high. It warns that an energy shock could lift UK CPI by about 65 bps by mid-year and limit the scope for Bank of England rate cuts. The bank sets out risks from higher oil and gas prices for inflation, growth, and public finances. It notes that scrutiny of UK fiscal policy has remained strong since the September 2022 Truss mini-budget, alongside high public debt and sensitivity in the gilt market.

Energy Prices Inflation And Growth Risks

Rabobank says a longer spike in gas prices could reduce the Chancellor’s fiscal headroom and weigh on growth. It estimates the energy crisis could push headline CPI to 2.7% by mid-year, instead of the previously forecast 2%. It adds that local elections in England and parliamentary elections in Wales and Scotland take place in May. Rabobank says a poor result for Labour could lead to a leadership contest for Keir Starmer, and it links persistent higher wholesale energy prices into May with added political risk. The bank expects recent Sterling support from position adjustment to fade in the coming months. We believe the recent strength in the Pound Sterling is unlikely to last, as significant risks are building for the UK economy. A potential energy shock is a primary concern, which could add significant pressure to UK inflation by the middle of this year. This view is supported by the latest Office for National Statistics data from February 2026, which showed a surprise uptick in energy import costs.

Bank Of England Policy Constraints

This inflationary pressure would make it very difficult for the Bank of England to consider any further interest rate cuts in 2026. As we saw when looking back from 2025, the UK economy is sensitive to stagflationary pressures, which limit the Bank’s ability to support growth. The market has been pricing in at least one rate cut, so a shift in that expectation would weigh on the currency. The UK’s fiscal situation also remains a serious challenge, a persistent worry since the gilt market crisis of 2022. High public debt, which the Debt Management Office recently reported as holding at 99.5% of GDP, gives the government very little flexibility to respond to an economic slowdown. Any new spending pressures from higher energy prices would further erode confidence. Political uncertainty is another key factor, with local elections scheduled for May 2026. A poor showing for the ruling Labour party could trigger a leadership challenge against Prime Minister Starmer, creating instability. Recent polling from Ipsos shows Labour’s approval rating has fallen by four points since January, making this a tangible risk for markets. For derivative traders, this outlook suggests positioning for a weaker Pound in the coming weeks. Buying GBP/USD put options or establishing put spreads could provide downside protection against these accumulating risks. We have already seen three-month implied volatility for Sterling tick up to 8.2% as traders begin to price in this uncertainty. The recent support for Sterling, driven largely by the closing of short positions, appears to be running out of steam. The combination of rising inflation risk, fragile public finances, and political headwinds creates a compelling case for renewed GBP weakness. Looking at the relative calm of late 2025, the current environment feels notably more hazardous. Create your live VT Markets account and start trading now.

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