The UK inflation rate rose more than expected in December, raising the likelihood that the Bank of England may slow or pause further interest rate cuts at its next policy meeting.
Annual consumer price inflation increased to 3.4% in December, exceeding forecasts of 3.3% and edging higher from 3.2% in November. While inflation remains well below the peak seen in 2022—when surging energy prices following Russia’s invasion of Ukraine pushed the rate to a 40-year high of 11.1%—it continues to sit above the Bank of England’s 2% target.
The latest data may disappoint policymakers after inflation had fallen sharply from 3.6% in the year to October. As a result, the December reading adds complexity to the central bank’s decision-making ahead of its early February meeting.
On a monthly basis, consumer prices rose by 0.4%, reversing a 0.2% decline in November. Core inflation, which strips out volatile food and energy costs, increased 0.3% month-on-month and held steady at an annual rate of 3.2%, unchanged from the previous month.
Despite inflation remaining higher than in other Group of Seven economies, the Bank of England’s Monetary Policy Committee voted narrowly—by a 5–4 margin—to cut interest rates by 25 basis points in December. The decision, which required a tie-breaking vote from Governor Andrew Bailey, lowered the benchmark rate to 3.75% from 4%, its lowest level since early February 2023.
Analysts at Capital Economics said the uptick in inflation reduces the chances of another rate cut at the Bank’s February 5 meeting. However, they still expect inflation to fall back to 2.0% by April, a move that could pave the way for interest rates to be reduced to around 3.0% later this year.
