The UK’s M4 money supply grew by 4.3% year on year in March. This compares with 3.6% in the previous period.
The recent UK M4 money supply data for March shows an unexpected jump to 4.3% year-over-year growth, accelerating from the previous month. This suggests more cash is flowing through the system than anticipated, which is a leading indicator for future inflation. We must take this seriously as it challenges the narrative of steadily cooling price pressures.
Money Supply And Inflation Signals
This monetary data is particularly important given that the latest inflation figures for April showed CPI is still at 2.8%, stubbornly above the Bank of England’s 2% target. This combination of rising money supply and sticky inflation makes it much less likely the Bank will consider cutting interest rates in the next few months. We should now be pricing in a more hawkish stance from policymakers through the summer.
For interest rate traders, this means we should re-evaluate positions that bet on falling rates. We see opportunities in selling short-term interest rate futures, like those based on SONIA, to position for borrowing costs remaining high. Gilt futures will likely face downward pressure, making put options on them an attractive hedge.
In the currency markets, these developments are supportive for the British pound. Higher-for-longer interest rates tend to attract foreign capital, strengthening the domestic currency. We should consider long positions on GBP against currencies whose central banks are closer to cutting rates, possibly through call options on pairs like GBP/USD.
This situation could introduce choppiness for UK equities, especially in rate-sensitive sectors. We believe derivative plays that benefit from increased market volatility, such as buying futures on the FTSE 100 Volatility Index, are now warranted. Hedging long stock portfolios with put options on the index is also a prudent defensive move.
Shifting Market Rate Cut Expectations
Looking back, this marks a clear shift from the market sentiment we saw through much of 2025, when expectations were building for a significant cycle of rate cuts. That narrative appears to be on hold for now. The March M4 data serves as a reminder that the path back to 2% inflation is not a straight line.
