The United Kingdom Retail Price Index (month-on-month) rose by 0.8% in March. This was above the expected increase of 0.7%.
The outturn was 0.1 percentage points higher than forecasts. The figures compare the change in the index from February to March.
This higher-than-expected inflation reading suggests the Bank of England will be less likely to cut interest rates soon. We need to position for a more hawkish central bank policy in the second quarter of 2026. The market was leaning towards a summer rate cut, but this data makes that view much harder to hold.
In the interest rate markets, we should expect short-term SONIA futures contracts for late 2026 to sell off, reflecting higher rate expectations. Implied volatility on interest rate options will likely rise as the path for monetary policy becomes less certain. This repricing is already visible, with swap markets now pricing in only a 40% chance of a rate cut by September, down from 65% just last week.
This development should provide support for the pound sterling against other major currencies. We could see traders buying GBP/USD call options, targeting a move back towards the 1.2900 level last seen in late 2025. The UK’s inflation persistence stands in contrast to recent cooling seen in Eurozone data, which supports a stronger GBP/EUR cross.
For equities, the outlook is more cautious, as sustained high borrowing costs can weigh on corporate earnings. We might consider buying put options on the FTSE 250 index, which is more exposed to the domestic UK economy than the internationally-focused FTSE 100. Remember the sharp sell-off in rate-sensitive sectors like homebuilders during the inflation scare we experienced in the spring of 2025.
UK government bonds, or gilts, will likely come under pressure, pushing their yields higher. We should anticipate further selling in long-dated gilt futures as investors demand more compensation for inflation risk. The 10-year gilt yield has already risen 10 basis points to 4.41% on this news, its highest level this year.
