The UK Retail Price Index (RPI) rose by 4.1% year on year in March. This was above the expectation of 3.9%.
The March figure was 0.2 percentage points higher than forecast. It indicates annual RPI inflation remained above the predicted rate.
This higher-than-expected inflation figure suggests that price pressures in the UK economy are more persistent than we anticipated. The Bank of England will likely view this as a reason to delay any potential interest rate cuts that were being priced in for the summer. We should therefore adjust our rate expectations to be more hawkish for the remainder of 2026.
This data point does not stand alone, making it more significant for our strategy. Recent statistics show UK wage growth remained elevated at 5.6% in the three months to February 2026, fuelling the kind of services inflation that the Bank is most concerned about. This confirms the underlying inflationary heat is not fading as quickly as hoped.
For interest rate traders, this means we should anticipate a sell-off in UK government bonds, pushing yields higher. We are seeing the forward curve for SONIA futures reprice, with the market now indicating less than a 50% chance of a rate cut by September, down from over 80% just last month. Positions that benefit from higher short-term rates, or paying fixed on interest rate swaps, now look more attractive.
This situation feels very similar to the pattern we observed back in 2024, when sticky inflation repeatedly forced the market to push back its timeline for BoE rate cuts. In that period, sterling gained against currencies whose central banks were more dovish. History suggests a similar playbook could unfold now, where being too early on easing expectations proves to be a costly mistake.
In the foreign exchange markets, this supports a stronger British Pound. Higher interest rate expectations make holding sterling more attractive for international investors, a factor that has already pushed the GBP/USD exchange rate up by 0.5% to 1.2850 in overnight trading. We should consider buying call options on sterling to capitalise on potential further upside against the dollar and the euro.
For equities, this outlook presents a headwind, as higher borrowing costs can squeeze corporate profits and dampen economic activity. We should consider hedging our exposure to UK stocks, as the FTSE 100 has historically underperformed during periods of rising rate expectations. Buying put options on the FTSE 100 index could serve as a useful portfolio protection strategy in the coming weeks.
