UK inflation jumps in April, raising prospect of BoE rate cut delay

By Andy Bruce and William Schomberg

(Reuters) -Britain suffered a bigger-than-expected inflation surge in April, prompting investors to bet on the Bank of England slowing its already gradual pace of interest rate cuts.

The annual inflation rate hit 3.5% in April, its highest reading since January 2024. The increase from 2.6% in March was the largest between two months since 2022 when price growth was rocketing above 10%.

A jump in air fares over the Easter holiday was a driver of the sharp climb.

A Reuters poll of economists had pointed to a reading of 3.3% in April. The Bank of England earlier this month had projected consumer price inflation of 3.4%.

Britain now has the second-highest inflation rate of any major Western European economy, behind the Netherlands.

The data will add to unease over the outlook for Britain's economy which grew strongly in early 2025 but is likely to slow.

Finance minister Rachel Reeves said she was disappointed.

"We are a long way from the double-digit inflation we saw under the previous administration, but I'm determined that we go further and faster to put more money in people's pockets," Reeves said.

Sterling first rose against the US dollar after the figures but then weakened. Gilts underperformed against other government bonds.

The chance of a BoE rate cut in August was cut to 40% by investors, down from 60% before the inflation data.

However, interest rate futures pricing suggested investors saw about 37 basis points of BoE rate cuts by the end of 2025, little changed from Tuesday.

Allan Monks, an economist at JP Morgan, said the data called into question the likelihood of a rate cut over the summer.

"The surprise will reinforce the BoE's hawkish bias," Monks said in a note to clients. "The door to a June cut appears shut and the likelihood of an August cut (still our base case) has shifted lower."

'AWFUL APRIL'

Services price inflation - a key gauge of domestic inflation pressure - leapt to 5.4% in annual terms in April, above all forecasts in the Reuters poll for an increase to 4.8%. It was far above the BoE's prediction of a reading of 5.0% for April.

In April alone, services prices rose by 2.2% - the biggest monthly increase in 34 years.

The ONS said the timing of the Easter holiday, which took place in April this year, was probably a contributor to the big jump in air fares which surged by 27.5% from March, the second-biggest month-on-month increase for April on record.

Analysts at consultancy Pantheon Macroeconomics said not all of the jump in services inflation could be pinned on the higher airfares and their forecast of two more BoE rate cuts this year was now hanging in the balance.

Newspapers had billed last month as "Awful April" because of increases in gas, electricity and water prices, alongside higher taxes on employers - all of which are pushing up inflation.

The BoE has predicted that inflation will hit 3.7% by September.

Some officials at the central bank disagree with its key assumption that the climb in inflation will not have longer-running effects on pricing behaviour.

BoE Chief Economist Huw Pill said on Tuesday the pace of interest rate cuts had been too fast given still strong wage pressures on inflation, but his vote this month to keep borrowing costs on hold was likely to prove "a skip" not a halt.

A survey of employers published earlier on Wednesday suggested employers were starting to lower their pay increases for staff.

The BoE lowered interest rates by a quarter point to 4.25% on May 8 in a three-way split vote, with two members of the Monetary Policy Committee favouring a bigger cut, and two - including Pill - favouring a hold.

(Writing by Andy Bruce, Graphic by Sumanta Sen, Editing by William Schomberg and Andrew Heavens)