Pound Sterling held firm against the euro and US dollar after UK inflation rose as expected, reinforcing a finely balanced outlook for Bank of England policy.
The Pound to Euro exchange rate (GBP/EUR) is seen trading flat on the day at 1.15031, while the Pound to Dollar exchange rate (GBP/USD) is marginally higher at 1.35155.
UK CPI inflation increased to 3.3% year-on-year in March, up from 3.0% in February, largely driven by higher energy costs following the Middle East shock.
Pantheon Macro said the rise was primarily fuel-driven, with limited evidence of broader inflation pressures accelerating.
“Energy more than accounts for the acceleration in headline CPI,” it noted.
Core inflation eased slightly to 3.1%, suggesting limited pass-through into underlying prices for now. However, services inflation rose to 4.5%, highlighting persistent domestic pressures.
Pantheon flagged that underlying momentum is firming.
“Underlying inflation pressure… accelerated… the strongest since last April,” it said, adding this could “tip the balance towards hikes if oil prices stay high”.
ING took a more cautious view, arguing the data offered little new information for policymakers.
“There were no major surprises in the UK inflation data,” it said, noting that higher fuel costs lifted headline inflation while core components such as clothing softened.
Crucially, ING downplayed the rise in services inflation, attributing much of it to temporary factors such as airfares.
“The rise in services inflation was largely airfare-related,” it said, adding that second-round effects have yet to materialise.
As a result, ING expects the Bank of England to remain on hold for now, with current market pricing for tightening seen as excessive.
“We think the BoE will stay on hold… until year-end.”
Lloyds struck a similarly measured tone, highlighting that while inflation rose, it did not exceed expectations.
“There may be some sense of relief… that it wasn’t worse,” the bank said.
The core reading aligned with pre-conflict forecasts, suggesting no immediate broadening of inflation pressures despite the energy shock.
However, services inflation remains a concern for policymakers given its persistence.
“The main point of concern will be… services inflation,” Lloyds said.
For markets, the takeaway is that while inflation remains above target, it has not shifted the policy outlook decisively in either direction.
Near-term expectations for rate hikes have eased, but sticky domestic inflation and elevated energy costs mean the Bank of England is unlikely to move quickly toward cuts either.
The result is a “higher-for-longer” stance, with policy likely to remain on hold as officials assess whether energy-driven inflation spills more meaningfully into the broader economy.
