Key Moments
- United Kingdom inflation stayed above target in March, with headline CPI rising to 3.3% y/y from 3.0% in February.
- Market pricing shifted after the CPI release, with the UK swaps curve signaling nearly 50 bps of Bank of England rate hikes over the next twelve months.
- Brown Brothers Harriman’s Elias Haddad expects GBP/USD to trade between 1.3400 and 1.3700 in the near term.
BoE Policy Expectations Challenged by Inflation Data
Brown Brothers Harriman’s (BBH) Elias Haddad highlights that inflation in the United Kingdom remains stubbornly above the Bank of England’s target, limiting policymakers’ scope to disregard the recent energy shock. At the same time, he contends that current market expectations for Bank of England (BoE) tightening are too aggressive when set against estimated slack in the economy.
Details of the Latest CPI Report
Haddad notes that the March Consumer Price Index (CPI) release aligned with consensus on the headline figure but showed nuances in core and services components.
| Inflation Metric | March Reading | February Reading | Consensus (March) | Comments |
|---|---|---|---|---|
| Headline CPI (y/y) | 3.3% | 3.0% | 3.3% | Increase driven by higher motor fuel prices |
| Core CPI (y/y) (ex-energy, food, alcohol, tobacco) | 3.1% | 3.2% | 3.2% | Unexpected slowdown versus consensus and prior month |
| Services inflation (y/y) | 4.5% | 4.3% | 4.3% | Acceleration relative to both February and expectations |
“Persistently above target UK inflation leaves the BoE with little room to look through the energy shock. In line with consensus, headline inflation quickened to 3.3% y/y vs. 3.0% in February on higher prices for motor fuels. Core inflation (excluding energy, food, alcohol and tobacco) unexpectedly slowed to 3.1% y/y (consensus: 3.2%) vs. 3.2% in February and services inflation rose to 4.5% y/y (consensus: 4.3%) vs. 4.3% in February.”
Market Repricing and Economic Slack
Haddad points out that the inflation report prompted a repricing across UK rates markets. The swaps curve moved higher, with traders assigning greater probability to additional BoE tightening over the coming year.
“The UK swaps curve adjusted higher following the CPI report to imply greater odds of nearly 50bps of rate hikes over the next twelve months. BoE rate hike bets are still too rich in our view given excess slack in the economy.”
He underscores that BoE projections indicate underutilized capacity in the economy over the medium term. “The BoE estimates a negative output gap of -1% of GDP in 2026.”
GBP/USD Outlook: Consolidation Within a Defined Range
Against this macro and policy backdrop, Haddad expects limited directional breakouts in the British pound against the U.S. dollar in the near term.
“GBP/USD will likely trade within a 1.3400 and 1.3700 range in the near term.”
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