Future rate cuts 'in jeopardy' as inflation surges to 3.5%

UK CPI accelerated to 3.5% in April, from 2.6% in March, largely due to a wave of household bill increases. It marks the largest year-on-year increase in prices since January 2024.

Core inflation came in at 3.8% in the 12 months to April, up from 3.4% in March and higher than forecast.

Inflation was driven by higher energy, water and council tax bills, as well as increased contract charges from the start of the new financial year. Furthermore, the hike in National Insurance and minimum wages kicked in for employers, with many companies choosing to pass extra costs onto customers.

As a result, many industry experts predict that rising inflation could curb future Bank Rate cuts this year.

Rob Morgan, chief investment analyst at Charles Stanley, said: "The current acceleration in inflation was anticipated and is expected to subside after peaking in the summer. However, the bump in services inflation to 5.4% will be a huge talking point for the Bank of England’s MPC. Policymakers will be keen to monitor whether additional employment costs might lead to wider and more sustained price rises across the economy.

"The element of doubt on services inflation is more than enough to kill off any hopes of a further June interest rate cut, which was already looking a remote possibility. Following on from better-than-expected economic growth, sticky core and services inflation could mean there are only one or two more quarter-point interest rate cuts to come this year. The BoE is weighing up an array of plausible inflationary scenarios, something reflected by the three-way split on the voting committee last time around."

Derrick Dunne, CEO of YOU Asset Management, commented: “The anticipation was clearly for price rises to accelerate as the Bank of England forecast, but this has exceeded expectations and is cause for concern. That being said, these figures are somewhat more complicated than the headline rate suggests. Much of the increase is thanks to annual bill hikes which have permeated the data at the start of the new tax year.

“Whether this recedes over the course of the rest of the year – with the prices of oil and gas critical reference points – will be crucial in ascertaining the Bank of England’s rate path moving forwards. In the short term at least, further rate cuts do appear to be in jeopardy.

“Considering the MPC has just cut its base rate, there is now cause for conflict at the Bank of England which could prove embarrassing. Only yesterday the bank’s chief economist cautioned that the MPC was going too fast. He was outvoted by his colleagues. But there might now be a pause to see if this new bout of inflation is sustained, or drifts away."

Lindsay James, investment strategist at Quilter, added: “There are now vocal concerns coming from the Bank of England that interest rate cuts have come too soon and that inflationary pressures need to be combatted. Chief economist Huw Pill sounded the warning earlier this week and today’s worse than expected inflation rate likely means further holds are imminent, especially given the strong economic growth seen in the first quarter.

“Things on the global picture are equally looking less beneficial for inflation. President Trump has watered down his tariffs, with further ‘trade deals’ for the US to be announced. Tariffs were expected to be disinflationary for the UK as global demand was expected to reduce and low-cost Chinese imports were expected to find their way to Europe and the UK in greater quantities. We may be out of the ‘higher for longer’ phase for interest rates, but today’s figures and recent news indicates that we cannot expect rates to fall as quickly as markets would like.”

Discussing the impact on mortgage rates, Peter Stimson, director of mortgages at MPowered, said: “We expected a jump, but what we got was a leap - in both headline and core inflation.

“The surge in inflationary pressure won’t just translate into a slowdown in base rate cuts. We’re in ‘handbrake on’ territory. The prospect of the Bank of England reducing its Base Rate again in June has shifted from slim to non-existent.

“With the economy starting to expand at a decent clip, the Bank is now less concerned about stimulating growth. Getting inflation under control, and forcing it back down towards its 2% CPI target, is once again the Bank’s top priority.

“It will have its work cut out, as there are some worrying trends below the surface of today’s inflationary numbers. And while a number of temporary factors make April’s spike look particularly bad, no-one should expect inflation to return to target by itself.

“The swaps market - which determines mortgage interest rates - had already been pricing in a jump in inflation today and a delay in the next Base Rate cut.

“But with Britain’s inflationary problem back with such vengeance, the odds on a Base Rate cut in August have lengthened too. The path towards lower interest rates will be longer and slower than thought as recently as just a few weeks ago.

“For now, mortgage rates have fallen as far as they can and we may even see them creep up over the next few weeks as lenders recalibrate their pricing in response to rising swap rates.”

However, others were more upbeat, stating that Bank of England isn’t expected to react to the rise in inflation as it was already predicted and factored into future forecasts.

John Phillips, CEO of Just Mortgages and Spicerhaart, said: “A rise in inflation was hardly a shock given the fact that April marks the start of the new financial year and brought with it wave of inflationary price hikes – most notably to energy and water bills and as businesses pass on both the rise in national insurance contributions and in the minimum wage.

“The big question is how will this impact the future path of interest rates. What we do know is the central bank has been clear it expected this rise in inflation and knows full well it is likely to creep up further before eventually coming down. The real elephant in the room is the impact of Trump’s tariffs on global economies and international trade which is still unknown. With plenty of uncertainty, it’s likely we could see a pause in June before returning to cuts later in the year."

Sarah Coles, head of personal finance at Hargreaves Lansdown, agreed: "While price rises look alarming, it won’t necessarily be setting off the alarm bells for the Bank of England. It has been predicting a spike for some time. It also expects inflation to remain relatively high for a period. Much of this has already been factored into its calculations when it decided to cut rates last month. It means these figures alone are unlikely to spark a dramatic rethink by the Bank.

"However, the latest twists and turns in the Trump tariffs drama mean some of the growing concerns about a global slowdown have eased very slightly. If the pause in tariffs leads to long-lasting agreements, it could drop down the list of things the Bank of England has to worry about. If it drops far enough down the list, it could mean that concerns about inflation overtake it, which could put the brakes on rate cuts. 

"Speculation over this possibility is what has caused the market to price in just one or possibly two more rate cuts in 2025 – where previously it had expected more. Yet with so much uncertainty over what happens next with tariffs, there’s enough concern over global growth for lower interest rates to still be on the cards this year.”